Should you choose a two or five-year fixed-rate mortgage?

What does a two-year fixed mortgage look like?

Fixed mortgage rates have been fluctuating so far in 2024. 

Understanding the current two and five-year fixed mortgage rates, as well as mortgage rate forecasts, is key to determining which option best suits your needs. 

A two-year fixed mortgage is a type of mortgage in which your monthly payment on a property remains the same for a set two-year period. 

At the end of those two years, your mortgage moves onto the lender's standard variable rate (SVR) or switches to a new deal with the same lender. 

Alternatively, you can remortgage to a deal of your choosing either independently or via a mortgage broker. 

What does a five-year fixed mortgage look like?

A five-year fixed mortgage is the same as a two-year fixed mortgage, except that the monthly payment structure extends to a five-year period. 

While you are paying off a fixed-rate mortgage, your interest rates will remain the same until the payment period ends.

What are the main differences between a two and five-year fixed mortgage?

The key difference between a two and five-year fixed mortgage rate is the time they are fixed for. A two-year fixed mortgage rate is for two years, while a five-year fixed mortgage rate is for five. 

However, that’s not exactly where their differences end.

Another differentiating factor is the interest rates associated with each length of mortgage. Short-term mortgages, like a two-year fixed mortgage, tend to have lower interest rates, while long-term ones, like a five-year fixed mortgage, generally have higher interest rates. 

This is because of the increased certainty and stability five-year fixed-rate mortgages provide. 

However, due to market fluctuation and the Bank of England’s base rate, this interest rate disparity is not always the case.

Since 2022, the interest rates on two-year fixed-rate mortgages have surpassed those of five-year mortgages, making the latter more affordable. 

Does the interest rate on a two and five-year mortgage differ?

The interest rates for two and five-year fixed mortgages differ depending on the Bank of England base rate and inflation. 

As of March 2024, the average two-year fixed mortgage rate at 60% loan to value (LTV) is 4.69%, according to HomeOwners Alliance, and the average five-year fixed mortgage rate is 4.37%. The average SVR is 8.17%.

Following the current mortgage rate forecast is crucial for making the best financial decision for your mortgage. 

The pros and cons of a two-year fixed mortgage

There are both pros and cons with a two-year fixed mortgage. Currently, it’s the more affordable fixed mortgage option, but that also doesn’t mean it will stay that way for long. 

Let’s take a look at the advantages and disadvantages of a short-term fixed mortgage.

The pros of a two-year fixed mortgage

• Lower initial interest rates: Currently, in 2024, the interest rates for two-year fixed mortgages are often lower than their five-year counterparts.
• Flexibility: A two-year mortgage's short-term nature means you have the flexibility to adapt your plan and take advantage of economic changes as they arise instead of being stuck with one rate for half a decade.
• Short-term commitment: A two-year fixed mortgage is less than half the time of a five-year fixed mortgage. That means you have the advantage of a much faster repayment process. 

The cons of a two-year fixed mortgage

• Higher potential fees: If you are hopping between many short-term fixed mortgages, the fees you rack up can become significant.
• Renewal risk: After the initial term, a two-year fixed mortgage may need to be remortgaged to avoid reverting to a higher rate. 

The pros and cons of a five-year fixed mortgage

Similar to a two-year fixed mortgage, the five-year option also has pros and cons. 

A longer commitment to paying off a mortgage offers advantages and disadvantages, and understanding them can help you decide which length of fixed mortgage works best for you. 

The pros of a five-year fixed mortgage

• Beat volatile interest rates: If interest rates are predicted to increase soon, being locked into a five-year mortgage provides the luxury of avoiding higher payments. This can be highly beneficial, especially if you are settling down into a “forever” home.
• Avoid the stress of remortgaging: Remortgaging is potentially expensive and tedious. With a long-term plan, you won’t have to deal with one for the next five years.
• Offers long-term stability: Five years is a long time to not face any potential hikes in interest rates. This results in a longer period of financial stability. 

The cons of a five-year fixed mortgage

• Higher interest rates: Although five-year fixed mortgages have been more affordable in the past, their rates are higher than two-year deals in 2024.
• Rigidity: When you’re locked into a five-year fixed mortgage, you won’t be able to take advantage of any falling interest rates.
• Long-term commitment: While a long-term fixed mortgage offers stability, it also prevents flexibility. The five-year commitment may become burdensome over time. 

What is the forecast in 2024 for two and five-year fixed mortgages?

The current prediction for mortgage rates in 2024 is that they will decrease. However, this may take longer than previously hoped for. 

With mortgage rates climbing much higher in recent years, we are likely to see some volatility throughout the mid and late 2020s. 

Seek expert financial advice

A mortgage is a serious financial commitment.

If you are looking for a short-term, flexible mortgage, a two-year fixed option will likely work best for you, while those looking to work on steadier, long-term financial goals may benefit more from a five-year fixed mortgage. 

To learn more about fixed-rate mortgages and how to find the most suitable one, get matched with a mortgage broker at Unbiased for expert financial advice.