The gap in rates between average two-year and five-year mortgages is at its narrowest since January 2023, according to data from financial data firm Moneyfacts.
The average two-year mortgage rate on the market is now 5.48% (correct as of 8th January 2025), while the average five-year fix is 5.25%, according to the Moneyfacts UK Mortgage Trends Treasury Report.
Over 12 months the gap in average rates has narrowed from 0.38% to just 0.23%.
The narrowing of the gap between two- and five-year fixes suggests the mortgage market is anticipating that falls in the Bank of England base rate – and the swap rate market which ultimately dictates mortgage rates – is slowing or stabilising rather than continuing to see decreases.
In the past, five-year fixes typically carried higher rates than shorter-term mortgages because the lender was providing more stability to the borrower and taking more rate-related risk on itself in the process.
But this relationship has been inverted since October 2022, according to Moneyfacts. Mortgage market volatility in the wake of the Government’s mini budget – and expectations that rates would fall – led to this inversion.
It means longer mortgage fixes are currently cheaper than short-term fixes, as the borrower exchanges higher interest for the benefit of longer certainty.
Rachel Springall, finance expert at Moneyfacts, explains: “Borrowers who prefer to lock into a shorter-term mortgage may be pleased to see that the rate gap between the average two- and five-year fixed mortgage has dropped to its lowest margin in two years. However, it remains the case that the average five-year mortgage rate is lower than its two-year counterpart, which may be more enticing for those who want peace of mind for longer when it comes to their monthly mortgage repayments.”
Should I go for a shorter fix?
It is hard to predict the direction of the mortgage market at the moment in terms of rates.
Two-year fixes are more expensive because lenders are still anticipating further falls, but this difference is now at its smallest since January 2023, on average.
If you opt for a shorter deal, you are agreeing to pay more interest over two years, but this may come with the benefit that you are able to switch to a cheaper deal sooner – saving money in the longer-term.
But, according to Ms Springall, there is no guarantee that rates will go lower. This is thanks to significant ongoing uncertainty in the global economy. This can make a longer fix still worthwhile.
“There was a mix of rises and falls during 2024 and it will be hard to predict where interest rates might go this year, particularly should stubborn inflation persist,” she says. “Stability in choice is good news to borrowers who may be concerned about product availability as we enter 2025. Indeed, the turmoil of the 2022 fiscal announcement saw an unprecedented amount of mortgage deals pulled from the market. It is hoped that there will not be a repeat of such upheaval in choice; it is much more likely to expect rates to fluctuate rather than mass product withdrawals.”
It is important when shopping around for a mortgage, whether you’re a first-time buyer or remortgaging, to ensure you’re considering all of the available options. Ultimately, a mortgage broker with access to the best deals on the market can help you find the right product and advise you on what length is the most suitable for your circumstances.