How long should you fix your mortgage for?

Posted on: 01 June 2010 by Mark O'haire

With talk of a hike in the base rate this summer, is it worth locking into a five-year fixed-rate deal now?

MortgageBritain's biggest building society Nationwide has slashed interest rates on its five-year fixed-rate mortgages by up to 0.31 percentage points.

The rate cuts are a response to increased competition in the five-year fix market, which has seen a more than ten-fold increase in demand over the last three years, according to research from

However, in this case, more competition has not necessarily meant lower costs.

Volatility takes its toll

Despite the number of fixed-rate products soaring from 39 in April 2007 to more than 400 now, the average fixed-rate mortgage remains more expensive than it was three years ago.

"It is interesting that, whilst (the number of) all other mortgage types have fallen off a cliff, the number of five-year fixed-rate deals has actually increased dramatically," says mortgage channel manager Hannah-Mercedes Skenfield.

Here, we investigate why five-year deals have become so much more numerous and ask whether buyers and homeowners looking for a new mortgage deal should consider fixing their rates for as long as five years.

Why are providers offering more five-year deals?

The number of five-year fixed-rate deals has shot up from just 39 to 411 over the last 36 months or so.

This astonishing increase is in stark contrast to the rest of the mortgage market, which has plummeted to just 12% of its size in April 2007.

Over the same period, the number of two-year fixes has fallen from 3,767 to 612, while the three-year product range has plunged from 2,398 to 449.

"To see the huge drop in the number of mortgages available compared to three years ago is a sobering reminder of just how badly the mortgage market was hit by the credit crunch," said Skenfield.

Banks want stable cash flow

She believes banks and building societies are so keen to lock borrowers into five-year fixed-rate deals because they want to build stability.

However, she also points out that the massive rise in the number of products of this kind indicates that consumers are less convinced of the benefits.

"No doubt providers are keen to lock in customers for the long term in order to gain some stability for their mortgage books," Skenfield added. "But a ten-fold increase in longer-term fixed-rate deals suggests that take-up of these products is probably quite low."

Is now a good time to fix in for five years?

The main reason for borrowers' reticence to commit to a five-year mortgage deal is that people are not confident enough to tie themselves in for this length of time.

This is especially true given the hit fixed-rate mortgage holders have taken over the last year or so in relation to their peers with variable-rate deals.

"Everyone knows that the only way rates can go is up, but five years is a big bet to place," said Skenfield.

Rates much higher than base

Another factor for those with knowledge of the mortgage market is that the rates on such deals look high compared with those available in the past, despite the historically low level of the Bank of England base rate.

The average five-year fixed-rate deal in April 2007 was 5.74%, whereas the equivalent average rate today is 5.82% - and that means margins over the base rate have rocketed from 0.49% to a massive 5.32%.

However, there are some advantages to fixing over the longer term.

Firstly, you have the security of knowing that your mortgage payments will not rise for a full five years, while taking out a deal for his length of time also means avoiding other switching costs such as arrangement fees.

Timing is everything

Given where we are with the interest rate cycle, it could prove the ideal time to fix for the longer term.

The risk of locking your mortgage for just two years is that your fixed rate will come to an end when interest rates are far higher.

Conversely, while five-year fixed-rates cost more than two-year deals at the moment, compared with historic five-year rates the current best deals look cheap.

They're unlikely to come down much further, so it could prove a shrewd move to lock in to a five-year fix now.

Choosing the right product

So what deals are out there at the moment? Nationwide's rate cuts certainly make its five-year range attractive.

However, its rates can still be beaten by rival providers including Britannia and First Direct, which has the cheapest five-year fix at 4.29% with a £998 fee. You must have a deposit of 35% or more to qualify for this deal though, so it's not for everyone.

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