28 Jan 2020

Five-year fixed mortgages grow more appealing to borrowers

Five-year fixed mortgages grow more appealing to borrowers

Competition in the five-year fixed mortgage market has intensified in recent years.

This is good news for home buyers, as there are now more mortgage deals available for this period than in the typically more competitive two-year term.

The extra cost of a five-year fix compared to a two-year deal has also dropped substantially.

More options

Financial services company Moneyfacts says there are currently 610 five-year fixes for people with a 25% deposit or more - 18 more than the number of two-year fixes.

Just five years ago, the number of two-year fixes outnumbered five-year deals by 148 and, even just a year ago, there were 17 more two-year products than five-year deals.

Darren Cook, a finance expert at Moneyfacts, said: “Intense competition among mortgage providers seems to have resulted in the two-year fixed-rate market becoming saturated, margins becoming squeezed and mortgage providers looking to entice borrowers to consider a longer five-year fixed-rate deal as an alternative.

“Healthy competition within the five-year fixed-mortgage rate market is good news for borrowers, as an increase in the number of available products will generally push rates down and introduce longer-term options that borrowers may have not previously considered.

“Five years ago, the average two-year fixed-rate mortgage at 60% loan-to-value (LTV) was 2.17% and the average five-year fixed-rate at 60% LTV was 3.1%, meaning that a borrower would have needed to pay a premium of 0.93% when considering an alternative five-year deal.

“This average premium has now reduced to just 0.26% - with the average two-year fixed rate at 60% LTV falling to 1.81% and the five-year average falling to 2.07%.”

Looking beyond interest rates

Darren added that, historically, borrowers seemed to have preferred the short-term commitment of a two-year fixed rate deal.

But now that product availability has significantly increased in the longer-term five-year mortgage market, borrowers may be looking beyond interest rates and more towards the stability of setting monthly mortgage repayments and hedging themselves against uncertain economic conditions in the longer term.

But he also said: “As with any mortgage, it is important that borrowers weigh up the overall true cost of any deal and make sure that a longer-term deal is suitable for their specific needs.”

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