Are Short-term Mortgages Better?

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In 2024, a growing number of homeowners are opting to fix their mortgage rates for just two years. This shift indicates that many are anticipating a drop in rates and better mortgage deals by 2026. Historically, UK households have leaned towards longer fixed terms, such as five years, to lock in stable rates. However, the trend towards shorter two-year fixes suggests a shift in strategy, with many homeowners now preferring to reassess their mortgage options sooner. This change reflects broader expectations of future rate reductions and more favourable offers in the coming years.

The Rise of Short-Term Mortgage Fixes

Analysis of UK Finance data from early 2019 to late 2023 shows that two-year mortgage products have consistently been less popular than five-year loans, with only one exception. There were periods when the number of five-year loans issued was more than twice that of two-year loans.

In the first quarter of this year, there were 83,010 five-year fixed-rate mortgages compared to 83,880 short-term mortgages of less than two years. In the previous year, the figures were 125,060 five-year fixes versus 50,020 mortgages with terms shorter than two years.

Lenders and brokers report that many households are choosing shorter mortgage terms because they expect interest rates to fall over the next two years. By opting for two-year fixes, they hope to benefit from lower rates when their current deals end, rather than committing to a five-year term.

MPowered Mortgages noted that for those moving home, 21% of fixed-rate products chosen were for a two-year term, but this figure nearly doubled to 38% in 2024.

However, borrowers should be cautious about future interest rate changes, as the direction of rates is uncertain. Consulting a qualified financial adviser or broker before making decisions is advisable.

Understanding Fixed Rate Mortgages

Fixed-rate mortgages often align with swap rates, which are influenced by long-term expectations for the Bank of England base rate. Currently, the base rate is at a fifteen-year high of 5.25%, but some predict it may decrease later this year.

Economists generally expect the base rate to continue falling next year. Investors anticipate it might drop to around 4%, while Capital Economics suggests it could fall to 3%. This would result in mortgage rates being significantly lower than those available now.

Two-Year Vs Five-Year Fixes

Currently, five-year fixed mortgages are less expensive than two-year ones. The average rate for a two-year fixed residential mortgage is 5.92%, while a five-year fixed rate is 5.5%, according to Moneyfacts.

However, choosing a cheaper five-year deal might not be beneficial if interest rates decrease next year. In such a case, borrowers could end up paying higher rates for the full five years.