Best mortgage rates for first-time buyers: How long should they fix for?

The prospect of buying a home for the first time can be as daunting as it is exciting.

For the majority of people it will be the biggest financial decision of their life, and this brings up plenty of challenges.

Securing the best possible mortgage deal is one of the most important things to get right, especially as rates are relatively high at the moment. 

While mortgage rates have been moving downwards in recent weeks, they are still a long way off the lows enjoyed by home buyers prior to interest rates rising in 2022.

Getting on the ladder: Coming through the mortgage process with the best possible deal is essential to many first-time buyers given that interest rates remain high

The average five-year fixed rate mortgage is 5.29 per cent, according to Moneyfacts, while the average rate for a two-year fix is 5.66 per cent.

Someone securing the average five-year fixed rate on a £200,000 mortgage to buy their first home could expect to pay £1,203 a month if signing up to a 25-year repayment term.

But someone able to secure the best first-time buyer five-year fix would see that monthly repayment fall to £1,038 a month. That’s an annual saving of almost £2,000. 

> When will interest rates fall again? Forecasts on how low the base rate may go 

How good a mortgage can I get? 

The type of mortgage deal a first-time buyer is able to get will depend on the size of their deposit as well as their personal circumstances, their income, debt and credit score.

Having a bigger deposit relative to the purchase price opens up cheaper mortgage rates, as lenders will deem the buyer a less risky borrower.

Mortgage rates are often available in tranches based on the size of the mortgage versus the property’s value. This is known as the loan-to-value. 

For example, if you had a 10 per cent deposit your mortgage would be 90 per cent loan-to-value, if you had a 25 per cent deposit it would be 75 per cent loan-to-value and if you had a 40 per cent deposit it would be 60 per cent loan-to-value. 

Speaking to a whole-of-market mortgage broker, rather than going direct to a bank or building society, is the easiest way of getting matched to the cheapest possible mortgage deal.

Weighing things up: For the majority of people, buying a home will be the biggest financial decision of their life – and this brings up plenty of challenges

Mortgage brokers will also run an affordability check to see what the maximum someone can borrow is. They will use information from bank statements, payslips or tax returns to do so. 

As a rough rule of thumb, most lenders typically limit most people to borrowing no more than 4.5 times their annual income. 

However, it can be lower dependent on any other loans and debts they may have to factor in, or potentially higher if their incomings and outgoings are robust.

It is also possible to borrow more than 4.5 times your income with certain lenders, depending on how much someone earns and how large their deposit is.

There are also certain lenders that provide higher multiples for certain professions, usually secure public sector jobs such as nurses or civil servants. 

The best mortgage rates for first-time buyers

We have taken a look at the best deals on the market based on a 25-year mortgage for a £226,000 property – the current UK average house price among first-time buyers, according to Nationwide.

The mortgage deals below are the cheapest products overall, when taking into account both the interest rate, the arrangement fee and valuation fees and cashback on offer.

There may be a lower rate available, but the higher arrangement fee or lack of cashback means it does not make it on to our best buy list.

40% deposit or more

Five-year fixed rate mortgages 

Barclays has a five-year fixed rate at 3.84 per cent with a £999 product fee at 60 per cent loan to value. 

Two-year fixed rate mortgages 

Coventry Building Society has a 4.54 per cent fixed rate deal with a £0 product fee at 60 per cent loan-to-value. This deal also comes with £500 cashback. 

25% deposit

Five-year fixed rate mortgages 

Virgin Money has a five-year fixed rate at 3.99 per cent with a £995 product fee at 75 per cent loan to value. The deal also comes with a £214 valuation fee, but this is more than offset by the £300 cashback.  

Two-year fixed rate mortgages       

Coventry Building Society has a 4.77 per cent fixed rate deal with a £0 product fee at 75 per cent loan-to-value. It also comes with £500 cashback. 

15% deposit

Five-year fixed rate mortgages 

Coventry Building Society has a five-year fixed rate at 4.51 per cent with a £0 product fee at 85 per cent loan to value. This deal also comes with £500 cashback.

Two-year fixed rate mortgages 

Coventry Building Society has a two-year fixed rate at 4.98 per cent with a £0 product fee at 85 per cent loan to value. The deal comes with £500 cashback.

10% deposit buyer

Five-year fixed rate mortgages 

NatWest has a five-year fixed rate at 4.68 per cent with a £995 product fee at 90 per cent loan to value. This deal also comes with £250 cashback.

Two-year fixed rate mortgages 

Tipton Building Society has a two-year fixed rate at 5.14 per cent with a £0 product fee at 90 per cent loan to value. The deal comes with a £275 valuation fee. No cashback.

5% deposit buyer

Five-year fixed rate mortgages 

NatWest has a five-year fixed rate at 5.21 per cent with a £995 product fee at 95 per cent loan to value.

Two-year fixed rate mortgages 

Nationwide Building Society has a two-year fixed rate at 5.79 per cent with a £0 product fee at 95 per cent loan to value. The deal comes with £500 cashback.

How long should first-time buyers fix a mortgage for?

First-time buyers have a tough call to make when deciding how long to fix their mortgage rate for.

Choosing what length to fix for depends on what you think will happen to interest rates during that time, and what your personal circumstances are – including if you will need to move after just a few years. 

Typically most people fix for either two years or five years, although there are some who will fix for three years or even 10 years. 

Those who fix for two years do so because they believe that interest rates will continue falling over the next 24 months, and a shorter fix will allow them to switch to a cheaper rate when that time comes. 

Or, because they think they may want to move again in five years or less – which would probably incur an early repayment charge on the mortgage.  

Expert: George Smith, mortgage broker at LDN Finance says that many of his clients are opting for either two or three years fixes at the moment

However, there will be many who prefer the cheaper five-year fixed rates, taking the view that mortgage rates are unlikely to fall much further from here. 

George Smith, a mortgage broker at LDN Finance says: ‘I am currently advising a lot of first-time buyers to fix in for two or three years. 

‘The sentiment at the moment is that we hope rates continue to drop over the next 12 to 18 months so there may be interest rate savings to be made at that point. 

‘Another factor in this decision is that a high number of first-time buyers have limited deposits so they may lower their loan-to-value in two years and therefore be in a lower interest rate bracket and secure a lower rate off the back of it.’

What about a tracker mortgage? 

If rates continue to fall, a tracker mortgage without an early repayment charge could put borrowers in a position to take advantage.

A tracker mortgage essentially tracks the Bank of England’s base rate plus or minus a percentage. 

For example, it could be base rate (which is currently 5 per cent) plus 0.5 percentage points, equalling 5.5 per cent.

Hypothetically, if the Bank of England were to cut base rate from 5 per cent to 4 per cent, this tracker rate will immediately fall to 4.5 per cent. 

However, for all the potential benefit, a tracker product will also leave people vulnerable to further base rate hikes in the meantime, while also being more expensive than fixed rates at present.

Hedging their bets: Borrowers are opting for two-year tracker deals are hoping that the Bank of England will cut base rate significantly over the next year or so

‘Lots of first-time buyers are asking about trackers,’ adds broker George Smith.

‘However the fix allows first time buyers to be able to budget month-to-month which many find attractive. 

‘Due to most trackers being Bank of England base rate plus a margin, they are currently starting from a much higher point than the fixes. 

‘This means the base rate would need to come down significantly to match a fixed rate, and then fall further to make up for the lost time. 

‘I advise clients that although there is no right or wrong answer, it’s a fairly large risk to take when buying their first home and when they may not have a huge deposit or any assets in the background.’

What next for mortgage rates?

Mortgage rates are moving downwards as big lenders such as Nationwide, HSBC, Halifax and Barclays keep undercutting one another to compete for new customers.

On 1 August, the Bank of England cut interest rates for the first time in over four years.

At present, markets are pricing in one further rate cut in 2024. If forecasts are correct, this could mean base rate will fall to 4.75 per cent by the end of 2024.

Looking further ahead, financial markets are forecasting base rate will fall to around 4 per cent by the end of next year before eventually settling at around 3.5 per cent in 2027.

Many people assume that mortgage rates are directly linked to the Bank of England base rate.

No dramatic cuts forecast: The base rate is not expected to return to the rock bottom levels seen in 2021/22 

In reality, future market expectations for interest rates and banks’ funding and lending targets and appetite for business are what really matters.

Fixed rate mortgage pricing often closely follows Sonia swap rates. A swap is essentially an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.

These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

In aggregate, swap rates create something of a benchmark that can be looked to as a measure of where the market thinks interest rates are going.

As of 14 August, five-year swaps were at 3.53 per cent and two-year swaps at 3.96 per cent – both trending well below the current base rate.

Roughly this time last year, five-year swaps were close to 5 per cent. Similarly, the two-year swaps were coming in above 5.5 per cent.

George Smith adds: ‘We’ve seen some really good movement on swap rates since the Bank of England rate cut. 

‘September is also looking like another possible cut so I’d be hopeful of some positive movement in terms of mortgage rates. 

‘We’ve also seen some sub 4 per cent rates be released which is, of course, fantastic to see. 

‘I personally feel like things will plateau toward the 3.5 per cent mark which feels like a good deal in terms of borrowing money. 

‘With lower interest rates comes increased house prices so I’m advising clients that now is a good time to buy and also potentially take advantage of lowering borrowing costs.’