The change in prices could cause a new financial dilemma for households, according to experts
Two-year mortgage fixes are likely to become cheaper than five-year deals this year, for the first time since Liz Truss was prime minister, experts have said.
Five-year prices have been lower than their two-year equivalents since 2022 – when Truss held her infamous mini-Budget – because of expectations that interest rates will fall over the next half decade.
But experts say this will flip later in 2025 if, as expected, the Bank of England lowers rates further.
Fixed mortgage prices are heavily based on swap rates, which follow long-term predictions for where the Bank of England base rate will go in the future.
Longer-term fixes are typically more expensive because there is more uncertainty over where the base rate will go in the future.
But in the past two-and-a-half years, interest rates have been high, and there has been an expectation from financial markets that they will drop over the long-term.
Nicholas Mendes, of John Charcol brokers, said: “Based on the latest economic data and shifting market expectations, it now looks likely that two-year fixed mortgage rates will fall below five-year fixed rates in mid-to-late 2025.
“When investors anticipate significant rate cuts in the near term, shorter-term swap rates tend to fall more quickly than longer-term swap rates, making two-year fixed mortgages cheaper relative to five-year fixes.”
Simon Gammon, managing partner at Knight Frank Finance, added: “If lenders feel confident that inflation looks benign over the short term, it’s certainly possible that we see two-year fixed rates priced below five-year products this year.”
But he said this “narrative has taken a bit of a knock in recent weeks” after January’s inflation figures came in hotter than expected: “We know that a spike in energy prices is coming, and the impacts of a trade war are relatively unknown, so the path of rates in the short term is subject to considerable uncertainty.”
Chris Sykes, technical director at brokers Private Finance, saidthe gap between the fixes could begin to narrow.
“Historically, two-year fixes for many years were cheaper than five year fixes. If rates level out towards the end of the year and the [Bank of England’s] Monetary Policy Committee says it is likely there will be no further base-rate movements, then we could see the gap between two-year and five-year rates continue to narrow.
“And as five years becomes less predictable again, or less predictable than a two-year, it could be we see more expensive five years than two years again.
“It will be a while before we see this for average rates but it could happen this year.”
According to Moneyfacts, the average two-year fixed mortgage rate is 5.40 per cent, and the average five-year rate is 5.23 per cent.
Data from the financial analytics firm shows that the average two-year fixed rate is lower year-on-year.
Alper Kara, professor of banking and finance at Brunel University, said: “There seems to be a growing expectation that two-year fixed-rate deals could become cheaper than five-year deals later this year.
“As the Bank of England moves closer to actually cutting rates, shorter-term swaps rates will start to reflect this more directly, potentially bringing two-year mortgage rates below five-year ones.”
What does it mean for households?
Experts have said that if two-year mortgage deals do get cheaper than five-year deals later in 2025, people remortgaging from later this year will face a new dilemma over what deal to opt for.
At the moment, many people are opting for two-year rates over five-year ones because they hope that rates will have reduced by the time they remortgage in 24 months’ time.
Last year, equal numbers of mortgage borrowers were taking out five and two-year mortgage deals, whereas in early 2022, twice as many were taking out long-term deals according to UK Finance data.
But once two-year deals are cheaper, the situation will be flipped.
David Hollingworth of L&C Mortgages said: “It will reinstate the question of whether borrowers want to pay for more peace of mind.
“More recently, many have been prepared to pay a premium to have a shorter term rate. That was because they hoped that rates would have reduced and they would be able to switch into a better deal sooner.”
Should you get a fix now?
If your mortgage fix is coming to an end soon, it is worth starting to look at new deals around three months in advance.
Most lenders let you lock in a new deal several months before you need it to start, so you could currently lock in a rate now even if your deal ends in May.
Then, if rates rise, you have a cheaper deal locked in, and if rates do end up going down, you can switch to a cheaper deal.
Another option is to go for a tracker mortgage, which will go down if the Bank of England base rate does, and up if the Bank raises rates.
These are usually more expensive than fixes, but they do allow customers to bide their time before locking in a fix, which may get cheaper in the future.
What happened in Liz Truss’s mini-Budget?
Five-year rates have been cheaper than two-year deals on average since September 2022 – the month of Liz Truss’s mini-Budget, which sent mortgage rates climbing.
On the day of the mini-Budget, the average two- and five-year fixed rates stood at 4.74 per cent and 4.75 per cent respectively but by the following Friday, these had risen to 5.17 per cent and to 5.1 per cent.
They kept climbing until the average two-year fixed rate hit 6.65 per cent on 20 October 2022.
The mini-Budget pushed up market expectations for interest rates, which influence fixed mortgage rates.