I’m remortgaging at the end of 2024: Should I fix for two or five years?

My wife and I are remortgaging at the end of the year and trying to weigh up our options between a two-year and a five-year fixed rate mortgage.

What’s your view? There isn’t a huge difference in monthly repayments between the two, but trying to get a sense of what will happen to interest rates in the future is a challenge.

Ed Magnus of This is Money replies: This question is being asked a lot at the moment.

As households continue to roll off their fixed rate deals – some of whom may have been paying as little as 1 per cent interest, the stakes now seem much higher, given they now have to fix above 4 per cent.

Although five-year fixes are usually slightly cheaper at the moment, the difference between two-year and five-year mortgage rates has narrowed in recent weeks making this decision even harder.

What are today’s mortgage rates? 

The lowest two-year fixed remortgage rate is now 4.27 per cent compared to 4.07 per cent for the lowest five-year fix.

On a £200,000 mortgage being repaid over 25 years, that’s the difference between paying £1,086 and £1,063 each month.

The average five-year fix is now 5.22 per cent, according to Moneyfacts, compared to the average two-year rate of 5.5 per cent.

However, two-year fixes are the product of choice at the moment.

Last month, Santander said 60 per cent of customers were choosing two-year fixes at present. 

For many, this is because they hope interest rates will be lower when they come to remortgage in two years’ time.

Less than a quarter of Santander customers are opting for five-year fixed rate products, even though they are currently cheaper. 

The remainder are mostly choosing fixes lasting three or ten years, or trackers. 

New normal? Fixed mortgage rates have been heading higher in recent weeks, despite the Bank of England cutting interest rates earlier this month

When will mortgage rates fall? 

Just because the majority of households are fixing for two years, does not mean they are necessarily right. 

Many households will be opting for two-year fixes because the consensus is that interest rates will continue to fall and mortgage rates will follow suit.

It is true that the Bank of England has started reducing the base rate – a trend which leads to lower mortgage rates in general. 

However, future interest rate cuts by the Bank of England are already baked into fixed rate mortgage pricing.

This is why the lowest priced five-year fixed rate products are hovering just above 4 per cent, rather than above the Bank of England base rate at 4.75 per cent.

Prior to the quickfire base rate rises between December 2021 and August 2023, the lowest mortgage rates have trended above base rate. That was the case at least between 2008 and 2022. 

Mortgage pricing is largely based on Sonia swap rates – an inter-bank lending rate, based on future interest rate expectations.

When Sonia swaps rise sufficiently it often results in fixed mortgage rates going up, and vice versa when they fall.

As of 14 November, five-year swaps were at 4.01 per cent and two-year swaps were at 4.22 per cent. It is very rare for mortgage rates to go below the equivalent swaps. 

What happens to mortgage rate pricing in the future will depend largely on what happens to inflation as well as the wider economy.

A sudden inflationary shock could send interest rates higher, while a recession could see the Bank of England cut rates more aggressively, for example.

Inflation forecast: The BoE expects the rate of inflation to hover just above 2% until 2027

How far will base rate fall? 

The most bullish forecasters on rate cuts have base rate coming down to as low as 2.75 per cent by the end of 2025, with Goldman Sachs analysts announcing this rate forecast recently.

Goldman’s prognosis would mean a quarter point interest rate cut at all nine meetings of the Bank’s Monetary Policy Committee (MPC) from December 2024 to November 2025.

At the more reserved end of the spectrum, Santander recently revealed it expects interest rates to fall to 3.75 per cent by the end of next year.

Meanwhile, economists at Capital Economics think the base rate will fall to 3.5 per cent by early 2026.

They had previously forecast that interest rates would fall to 3 per cent by the end of next year, but have concluded that rates will now fall more slowly as a result of the Labour’s first Budget.

New forecast: Capital Economics has changed its interest rate forecast because it now thinks the Bank of England will cut rates more slowly as a result of the budget

Looking further ahead, it is anyone’s guess. Santander predicts that base rate will remain between 3 per cent and 4 per cent for the foreseeable future.  

Meanwhile economists at Oxford Economics are forecasting they will fall to a low of 2 per cent in 2027.

If Santander’s prediction plays out, a five-year fixed rate mortgage could well play out to be the better option.

But of course, if Oxford Economics are right, then you may wish you had gone for the two-year fix. 

How long should you fix your mortgage?  

So with all that in mind, how long should mortgage holders fix for now? 

We spoke to Chris Sykes, technical director of broker Private Finance and Mark Harris, chief executive of mortgage broker SPF Private Clients.

Chris Sykes replies: There are a few things to consider to help make your decision.

First, the cost. Often mortgage deals have product fees attached to them, and there can also be legal fees, broker fees and early repayment charges to consider. 

It is worth taking these into consideration. Often people just look at the rate, but paying a £999 product fee every two years instead of every five years can add up over time, especially if added to the loan amount.

Second, is your property changing in value?

We sometimes see clients who have high loan-to-value mortgages, but have renovations planned which will significantly increase the value of their property. 

If you go from a high loan-to-value band to a lower one, you may be able to secure better rates in the future and a shorter term fix may be ideal.

Third, it will depend on your attitude to risk.

If rates continued to go up instead of going down could you afford higher payments in two years time? 

Plenty of people are securing five year fixed rates wanting to insulate themselves against any future changes in the market, after a rough few years.

Fourth, establish whether you need to make any changes to the mortgage or sell during the fixed term period.

Although mortgages are portable it is often best to be approaching the end of your fixed rate or be on a tracker when it comes time to move.

If you expect to make any changes in the next five years, then maybe a two year is better – possibly even a tracker depending on what your plans are. 

Mark Harris adds: The choice between a two and five-year fix will depend on several factors, including your attitude to risk and your own situation, as well as rates. 

Until recently, many customers opted for two-year fixes because their five-year equivalents were relatively expensive and they hoped that when they needed to remortgage again, longer fixes might be cheaper. 

Currently, there isn’t much difference in pricing between the two products, and of course you won’t know if you made the ‘right’ call until after the event. 

Speak to a whole-of-market broker to find the best deal for your circumstances, not forgetting to factor in the cost and hassle of remortgaging in a couple of years’ time if you choose the shorter fix.

Will fixed rates fall over the coming months?

Mark Harris replies: The pricing of fixed-rate mortgages has been on the rise since the Budget amid fears that it might stoke inflation, pushing up swap rates and slowing down the timing of expected reductions in base rate. 

It’s unfortunate timing if you are looking for a fixed-rate mortgage, as only a few weeks ago there were numerous sub-4 per cent options on two- and five-year fixes whereas now, there is nothing below 4 per cent. 

It is possible that fixes will continue to edge up further in the short term as the market tries to find its new level, so there is a danger that if you wait longer in the hope that some cheaper options become available, you could find up paying more.