Should I get a two-year or five-year fixed rate mortgage?

With interest rates at their highest level since the financial crisis, it can be tricky to know which fixed-rate deal to get if you’re looking for a new mortgage.

The average two-year mortgage rate is currently 6.85%, while the average five-year deal is 6.37%, according to Moneyfacts. This means that opting for a longer deal is likely to mean your monthly repayments will be lower.

But while a lower interest rate might seem tempting, if mortgage rates come down within the next five years, you could end up paying above the odds until the deal ends.

We can’t know for certain what will happen to mortgage rates, but it’s worth looking at forecasts

The Bank of England’s base interest rate is currently 5.25%, rising from 5% on 3 August. This marked the base rate’s 14th consecutive increase.

It is impossible to know with any certainty how interest rates will change. However, financial markets expect the base rate to keep climbing in the short run. It’s forecast to reach a peak between 5.75% and 6% by the start of 2024, then gradually decline after this.

Changes in the base interest rate tend to have a direct impact on mortgage rates in turn. However, it’s also possible that future rises in the base rate have already been ‘priced into’ fixed mortgage rates. This means they wouldn’t necessarily increase, unlike tracker mortgage rates that automatically rise or fall in line with base rate changes.

When and how quickly interest rates begin falling again will depend on how quickly the Bank of England can rein in inflation. Find out more about how interest rates are projected to change.

Two or five year fix?

When you decide whether to take out a two-year or five-year fixed-rate mortgage deal, it’s worth taking into account what you think mortgage rates will do. If you think they’ll stay where they are for several years, or even potentially increase, a five-year deal may make sense.

However, most forecasts anticipate a decline in interest rates within the next two years, meaning a shorter deal may prove more prudent. 

This way, if rates do fall – as broadly expected – you won’t be stuck paying above the odds for your mortgage for several years. Mortgage rates are at their highest level since 2008, and you want to avoid locking in a rate at its peak. 

Mortgage brokers say people currently remortgaging are increasingly considering tracker deals. This means if interest rates fall, their monthly payments will also fall. We explain more about tracker mortgages below.

Of course, anything can happen, and rates could still increase further. So there is no easy answer on which deal to choose. 

If you value certainty, a longer deal may be for you

One advantage of a five-year fixed-rate mortgage over a shorter deal is that you’ll know with certainty how much you’ll have to pay each month until the deal ends.

If you opt for a two-year fixed rate deal, you only have certainty for that time period. There’s a chance you could face a nasty shock to your finances at its conclusion.

You should also consider mortgage fees, which are often charged when remortgaging or taking out a new mortgage.

Read more: Help! Our cheap five year fixed-rate mortgage is coming to an end

Five-year mortgage deals are currently cheaper than their two-year counterparts

With the average five-year mortgage rate at 6.37% and the average two-year deal at 6.85%, your monthly repayments are likely to be cheaper with the former.

Using our mortgage repayment calculator, this is what your monthly repayments will look like if you take out an average two-and five-year fixed-rate mortgage deal with a balance of £200,000 and 20 years remaining:

In addition to lower monthly repayments, you’ll also be clearing more of the balance of the mortgage with the five-year mortgage, rather than just interest.

However, these cost benefits only apply for the duration of the first two years of the term. After this, if mortgage rates come down, fixed deals may be cheaper and you might regret committing to the longer deal.

Read more: ‘Can we still get a mortgage if my partner has bad credit?’

If you think interest rates will fall soon, a tracker mortgage could be worth considering

A tracker mortgage is directly linked to the Bank of England’s base interest rate, usually set at a certain amount above it. For example, if you had a tracker mortgage at 5.5%, when the Bank of England’s base rate increased by 0.5 percentage points in June, your rate would’ve increased to 6%.

Tracker mortgages are generally cheaper than fixed rate mortgages right now. The average tracker mortgage rate is at 6.02%, well below the average two-year fixed rate of 6.81%.

Unlike fixed mortgages, most trackers don’t have early repayment charges (ERCs) if you want to leave and switch to another deal. This means opting for a tracker mortgage could save you money in the short run, and give you time to watch how interest rates evolve before locking into a fixed deal down the line.

However, further rises in the base interest rate are anticipated. Any increase in the base rate will be directly reflected in your tracker mortgage rate, which could push costs above what you would pay with a fixed deal.

However, the flexibility of being able to switch to a fixed mortgage deal without paying a fee means this may not put you off choosing a tracker mortgage deal for the short term. If this is the case, make sure the tracker mortgage you opt for doesn’t come with ERCs.

Read more: ‘I’m struggling to pay my mortgage, should I switch to interest-only for six months?’

If in doubt, speak to a broker

Everybody’s situation is unique, and the mortgage deal that is right for one household may not necessarily be right for you. Speaking to a mortgage broker can give you a good idea of what deals are out there and within your budget. You can get estimates using our mortgage comparison tool.

If you’re concerned by the potential leap in your mortgage costs and your ability to meet them, it’s worth speaking to your lender.

Banks must currently offer struggling customers flexibility, including the option to switch to an interest-only mortgage deal for up to six months without this affecting their credit score.

It’s worth noting that if you switch to interest-only as a short-term option, you’ll increase your costs in the long term as you won’t be clearing your mortgage balance for a period of time. But there’s nothing to stop you overpaying in future once you are on a firmer financial footing.

See six things to do if your fixed-rate mortgage deal is ending.