cardboard poster being held up with the text "what should i do"

Should I fix my mortgage for 5 years?

Individuals who are in the process of purchasing a home or refinancing their mortgage are currently faced with a challenging decision regarding the duration of their fixed mortgage rate.


In the previous year, the majority of borrowers chose to fix their rates for a period of two years. This decision was based on the belief that interest rates would decrease during that time, and opting for a shorter fix would enable them to transition to a more affordable rate at the end of their product. However, the confidence in a significant decline in interest rates in the near future seems to be diminishing.


Consequently, an increasing number of individuals are now opting to secure their rate for a period of five years.

What is happening to mortgage rates?


Since the beginning of February, mortgage rates have been gradually increasing, contrary to the expectations at the start of 2024. In January, financial markets predicted that the Bank of England would commence reducing the base rate, which directly impacts mortgage pricing, starting from March.


However, due to disappointing inflation figures both domestically and in the United States, the Bank of England has decided to maintain rates for a longer period than initially anticipated. The prevailing consensus now suggests that the first base rate cut will occur in August/September, which is six months later than previously projected. Consequently, rather than experiencing a decline, the most affordable fixed mortgage rates have actually risen by approximately 0.5 percentage points since January, as lenders factor in a scenario of “higher for longer” interest rates.


According to Moneyfacts, the average five-year fixed rate is currently approximately 0.43 basis points lower than its two-year counterpart.


Should you fix for 5 years?


In terms of fixing a mortgage for five years, the main advantage is that it is currently more cost-effective compared to other options. However, for many individuals, the decision is not solely based on immediate savings but also on the long-term trajectory of interest rates.


The fear of being locked into a five-year fix at a 5 per cent rate in 2024, only to discover that they could have secured a 3 per cent rate in 2026 with a two-year fix, is a significant consideration.


The market’s implied path for the base rate, as outlined in the Bank of England’s Monetary Policy Report, suggests a decrease from 5.25 per cent to approximately 3.75 per cent by the end of 2026. It is worth noting that this forecast has increased by an average of 0.7 percentage points compared to the equivalent period in the previous report.


How do they predict mortgage rates?


The predictions for mortgage rates are primarily based on the Sonia swap rates, which heavily influence the pricing of lenders’ fixed rate mortgages. To mitigate the risk associated with lending fixed rate mortgages, mortgage lenders engage in interest rate ‘swap’ agreements.


These swap rates, which lenders pay, reflect their outlook on future fixed rates. As of 11 June, the five-year swaps stood at 4.09 percent, while the two-year swaps were at 4.62 percent – both indicating a downward trend compared to the current base rate.


It is crucial to note that fixed mortgage rates are indicative of the projected trajectory of interest rates. Consequently, the current fixed rates available in the market are based on the expectation of a lower base rate. This explains why fixed rates are lower than variable rate options and why they can fluctuate despite the absence of any movement in the base rate.



When will rates decrease?


The question of when mortgage rates may decrease is a topic of interest. A significant decline in fixed mortgage rates will only occur if future expectations for interest rates decrease further in the coming months and years. Economists anticipate a continued decrease in the base rate, with a potential drop to 3.75 percent in 2026. However, it is important to note that recent months have seen a shift in this trend, and there are no guarantees. Additionally, the availability of fixed rates at that time will depend on the projected direction of rates beyond that point.


Peter Stimson, the head of the product development team at MPowered Mortgages, believes that mortgage rates have reached their peak. He suggests that if there are potential rate hikes on the horizon, fixed-rate pricing may not deviate significantly from current levels. Conversely, if a further decrease is expected, fixed rates may reflect lower rates.


Stimson acknowledges the difficulty in predicting the future direction of mortgage rates but remains confident that they are unlikely to rise from their current position.


It is worth noting that the Bank of England’s interest rate cuts may not immediately result in a decrease in mortgage rates, as much of the anticipated cuts have already been factored into forward interest rate pricing. The extent to which rates will fall depends on the trajectory of inflation in the coming months and the timing and magnitude of any future rate cuts by the Bank of England.


While it is hoped that mortgage rates have reached their peak, the unpredictability of mortgage rates has been a lesson learned this year. Most commentators and experts agree that mortgage rates are unlikely to return to the historically low levels seen before 2022, when borrowers with significant equity could secure rates below 1 percent. Stimson believes that the Bank of England’s interest rates are likely to settle around 4 percent in the long term, with some variation depending on the overall state of the economy. If this prediction holds true, it is unlikely that fixed mortgage rates will see significant changes.


Before the rapid increase in the base rate between December 2021 and August 2023, mortgage rates typically exceeded the base rate. This trend persisted from 2008 to 2022. Therefore, even if the base rate settles around 4 percent, mortgage rates are expected to be higher unless there are indications of further rate decreases.


What should you do?


When considering mortgage options, you should take into account several factors. The decision on the length of the fixed term depends on your predictions about future interest rates during that period.


Additionally, personal circumstances play a role in this decision-making process. For instance, if you anticipate the need to relocate within the next five years, a five-year fixed term may not be ideal due to potential early exit fees. On the other hand, if you opt for a two-year fixed term are essentially speculating that interest rates will decrease in the next couple of years. You are willing to accept higher rates for two years, with the expectation that the subsequent rate will result in greater savings compared to a five-year fixed term.


Choosing a five-year fixed term provides short-term savings and offers certainty regarding payment amounts for a longer duration. You also have other options to consider, such as a two-year tracker mortgage that follows the Bank of England base rate. Although these tracker mortgages are currently more expensive than fixed-rate deals, borrowers without early repayment charges may be able to take advantage of base rate cuts.


There are also three-year and ten-year fixed terms that you may want to explore. A three-year fixed term could strike a balance for those who feel that two years may pass too quickly but still prefer to review their options sooner than a five-year timeline.


It is important to note that external factors can significantly impact interest rate forecasts over time, making it difficult to predict future changes. Instead of trying to anticipate market fluctuations, we advise to focus on what will work best for your individual circumstances.


If you are planning to stay in their property for an extended period, locking in a rate for five years or longer may be a suitable option that should not be dismissed. On the other hand, if you are hoping for rate reductions, you may take a shorter-term view, but you should also consider your ability to handle higher rates and payments if circumstances change.

#get in touch

Ready to get started ?

Speak to a MyContractorBroker specialist on 02394 211120

#get in touch

Ready to get started ?

Speak to a MyContractorBroker specialist on 02394 211122

Scroll to Top