Mortgage rates have hit a five-year high – is it time to fix?

Mortgage interest rates hit a five-year high last month. So should you fix your mortgage rate? And if so, how long should you fix for? Ruth Jackson investigates.

Mortgage rates hit a five-year high last month as markets reacted to the Bank of England interest rate creeping slowly but steadily higher. Is it time to fix, and if so, how long should you fix for?

The average interest rate on a two-year fixed-rate mortgage rose to 2.86% in April, the highest level since 2015, according to the Moneyfacts UK Mortgage Trends Treasury Report. At the same time the average interest rate on a five-year fixed mortgage also climbed. It rose to 3.01%, the highest since 2016.

The increases come after the Bank of England had increased the UK’s central bank rate to 0.75%, the third such rise since December, when it was sitting at a record low of 0.1%.

Standard variable rates (SVR) have also risen. Most of these move broadly in line with the central bank rate, so no surprise there. The average is now 0.1 percentage point higher than in March, rising to 4.71% – a two-year high.

Should you fix your mortgage rate now?

This all depends on your current interest rate. Let’s take the easiest answer first. If you are on a standard variable rate then you are highly likely to save yourself a lot of money by moving to a fixed-rate deal. Moneyfacts estimates that if you are sitting on the average standard variable rate with an average-sized mortgage, you could save more than £200 a month by moving to a two-year fixed-rate mortgage.

Of course, that will vary depending on the size of your mortgage, but the point is, if you’re on a standard variable rate you can almost certainly get a better deal by moving to a different mortgage. 

And if you do decide to move, then fixing now could be a wise move, says Eleanor Williams from Moneyfacts. “As there is no guarantee rates will not continue to climb, the incentive to secure a competitive new fixed rate to provide shelter from potential further rate volatility remains and, as our top tables show, there are still products with extremely competitive rates available.”

However, if you are already on a fixed-rate deal, then you are unlikely to save money by remortgaging now; you are likely to pay early repayment charges if you try to get out of your current deal before it ends. Plus, given that interest rates are on the rise, chances are your current deal is cheaper than what’s on offer. 

That said, if your deal is due to end soon and you are worried that rates will continue to rise (which certainly looks possible) you can start shopping around now. You can usually apply for a mortgage – and lock in that rate – up to six months before your current fixed rate ends.

How long should you fix your mortgage rate for?

The mortgage market became a bit topsy turvy in April – homeowners were able to get a better deal on a longer-term fix than on the short-term ones. Halifax began offering a five-year fixed rate mortgage and a ten-year version at 2.48%, whereas its two-year deal had a rate of 2.54%.

This is not what usually happens. Typically, you have to pay a premium for a longer fixed rate deal, as you are getting the security of a set interest rate for longer. But there are a couple of factors driving this.

Firstly, more and more of us are looking for longer fixed-rate deals. As a result, more lenders are entering the market for five and ten-year fixes. That means the market is more competitive than in the past, which in turn means lower prices (ie, interest rates).

“I wouldn’t be surprised to see more follow Halifax and price lower than a two-year,” Ashley Thomas, director at mortgage broker Magni Finance told This is Money. “We have seen a large increase in people enquiring for seven- or ten-year fixed rates as the price difference can be as low as 0.05%. This is worth considering if you are living in your dream home and have no plans to move for a long time.”

Secondly, while the Bank of England rate is important to mortgage pricing, what’s more important is the yield on longer-term government bonds (what it costs the government to borrow money). Put simply, the interest rate on a ten-year government bond is usually higher than the rate on a two-year government bond. 

However, markets are concerned that, while interest rates will rise in the short term, the Bank of England might have to cut rates further into the future, as the rising cost of living squeezes consumers and potentially results in recession.

Disappearing fixed-rate mortgage deals

If you are thinking about remortgaging, you need to act fast to grab the best deals. Research by Moneyfacts has found that mortgage deals are on the market for just 21 days on average at present. In contrast, the average deal was available for 48 days in April 2020.

“Those hoping to secure a new mortgage may wish to act sooner rather than later to lock in a competitive option, as not only have average rates continued on an upwards trajectory this month, but prospective borrowers may find that their selected products are not on offer for long,” says Williams.

The best fixed-rate mortgages (as of 4 May 2022)

 

Mortgage 

Rate

Fee

Max LTV

Two-year fixed rate mortgage 

First Direct

2.29%

£490

75%

Five-year fixed rate mortgage

Ulster Bank

1.87%

£995

80%

Ten-year fixed rate mortgage

Nationwide

2.24%

£999

60%

Source: Moneyfacts

• SEE ALSO:

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