AN uncommon mortgage is now the cheapest option for borrowers looking to buy, remortgage or get on the property ladders.
Three-year fixed-rate mortgages have taken the lead as the most affordable option in the current market.
This shift is driven by lenders seeking to attract borrowers wary of locking into longer-term deals amidst fluctuating interest rates.
MPowered Mortgages currently offers the lowest rate across the market at 4.07% for a three-year fix, with a £999 arrangement fee.
This equates to monthly payments of £1,064 on a £200,000 mortgage over 25 years.
This deal undercuts the lowest two and five-year fixes from First Direct (4.23% and 4.13%, respectively), which come with a lower £490 fee.
While these top deals often require a 40% deposit, the narrowing gap between shorter and longer-term fixes is significant.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Borrowers would traditionally opt for a two- or five-year fixed mortgage, but as interest rates have been unpredictable over recent years – a three-year fixed deal might gain popularity.
“As the traditional markets are thriving with lenders, it can make it difficult for some lenders to stand out on price alone.
“The three-year fixed market consists of fewer lenders than the two or five-year sectors, and therefore there are fewer three-year fixed deals, so it may be more fruitful for some to get noticed by pricing their deals to lead that area of the market.”
Traditionally, shorter fixes meant lower rates, but this trend reversed in 2022 as interest rates began to climb.
Lenders, betting on eventual rate drops, made five-year fixes more attractive to lock in borrowers for longer periods.
However, the gap between two and five-year fixes is now shrinking.
The premium borrowers paid for a two-year fix over a five-year one has fallen from 0.4-0.5 percentage points in mid-2024 to just 0.2 percentage points today.
According to data from moneyfactscompare.co.uk, the average two-year fixed rate now sits at 5.52%.
Meanwhile, three and five-year fixes are virtually neck and neck, averaging 5.33% and 5.32% respectively.
This makes three-year deals a particularly compelling option, offering a balance between shorter-term flexibility and competitive pricing.
Rachel added: “Those borrowers who feel a two-year fixed is not quite long enough may then want to explore the options available on a three-year fixed term, ideally with an independent broker to go find the best deal to suit their circumstances.”
Why are three-year mortgage deals uncommon?
Three-year mortgage deals are not as common as two- or five-year fixes because lenders used to price them less attractively.
Borrowers are usually drawn to the perceived security of a five-year fix, especially during times of economic uncertainty.
Five-year fixes also tend to allow for greater borrowing amounts, making them appealing to those needing larger loans.
But Ravesh Patel, director and senior mortgage consultant at broker Reside Mortgages, told Thisismoney.co.uk: “Lenders seem to be pricing in the possibility of Bank of England base rate cuts further down the line, which makes shorter-term fixes comparatively more attractive.
“It’s noteworthy that some three-year fixes are now even lower than five-year deals.
“This could certainly encourage more homeowners to opt for shorter fixes, especially those who believe they might be able to remortgage at a lower rate in a few years.”
Although shorter-term fixes like two or three-year deals might be attractive to those gambling on lower future rates, the five-year fix remains the dominant choice for those prioritising budget stability and peace of mind.
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Are there special mortgages for first-time buyers?
A number of lenders have launched mortgages which help wanna-be buyers who are struggling to get a deposit.
Earlier this week, Barclays launched a “mortgage boost” will let both first-time buyers and existing homeowners add another person to their application to increase the amount they can borrow.
This could help them get on the property ladder with a smaller deposit or move to a larger home.
In an example provided by the bank, someone with an income of £37,500 a year and a deposit of £30,000 could typically borrow £168,375, allowing them to buy a home worth up to £198,375.
But with the mortgage boost, if they added another person with an income of £37,500 a year, they could borrow up to £270,000 – closer to the UK’s average house price of £282,000, according to the Office for National Statistics.
TSB recently launched a new “5&5” concessionary mortgage option for its customers.
Under the lender’s new scheme, landlords offer their tenants a 5% discount on the property’s market value in exchange for putting down a minimum of 5% deposit.
Concessionary mortgages allow wannabe homeowners to bag a property for less than the market value.
They are usually used by landlords selling a house to their tenants, or someone selling a property to a relative.
A number of lenders offer some variation of this mortgage type including NatWest.
Another option is a Lifetime ISA (LISA) was launched in April 2017 and is a savings product which is designed to help people save for either a first home or retirement.
The account is tax-free and anyone aged between 18-39 can open one.
You can save up to £4,000 a year and the government will then add a 25% bonus on top.
If you save the maximum amount between the ages of 18 and 50 you could get as much as £32,000 for free.
You’ll also earn tax-free interest on your savings pot, including the added extra from the government.
If you choose to buy a property it must cost less than £450,000 and you must buy it at least 12 months after you make your first payment into the Lifetime Isa.
There are strict withdrawal rules surrounding a LISA that prospective users should be aware of.
For example, you can only make an authorised withdrawal from your LISA to purchase a house or if you are terminally ill.
Anyone who has opened a LISA for retirement will also be able to access the cash without penalty when they turn 60.
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