Average mortgage rates have fallen over the past two weeks, but there is now little difference between a two-year and a five-year fixed rate.
With the majority of the market poised to expect interest rates and mortgage rates to fall in the coming months, many borrowers have been torn between locking in for just two years in the hope of a better deal next time, or securing the lower five-year rate for a longer period of certainty.
For some, the choice may now be easier – or more difficult, depending on your position – because the difference between the average two-year fix and the average five-year fix has just fallen to a two-year low, according to Moneyfactscompare.co.uk.
The gap between the two rate lengths is now just 0.23%, with two-year fixed rates now averaging 5.48% and five-year fixed rates averaging 5.25% across all loan to values. This is the shortest gap since January 2023, when the difference was just 0.16%.
Average mortgage rates have also fallen since December 2024’s figures, when the average two-year fixed rate was 5.52% and the average five-year was 5.28%. Rates have dropped across all loan to value brackets, while the average standard variable rate (SVR) is also lower, falling from 7.85% to 7.81% this month.
The only rate to have seen an uptick was the average two-year tracker, which has moved up slightly from 5.46% to 5.47%.
Improved mortgage rates and better choice
According to Moneyfacts, there was more good news for borrowers this month as the number of products on the shelf increased from 6,486 in December to 6,508 in January. Compared with a year ago, product choice is “substantially higher”, when lenders only had 5,899 deals to choose from.
This demonstrates that lenders are keen to compete for customers, and means that anyone looking to take out a new mortgage or remortgage at the moment will be more likely to find a product tailored to their needs.
Mortgage products can vary considerably, meaning borrowers should consider much more than just mortgage rates. As well as product length, some products will come with higher fees, whereas others have no fees. Some will also offer added incentives, such as cash back or free legal fees, which can be beneficial depending on your circumstances.
The greater your deposit, the greater your choice of mortgage options. Moneyfacts’ figures show that, for borrowers looking to secure a mortgage with just a 5% deposit (95% LTV), there are only 366 products. But for those with just a slightly higher deposit of 10% (90%), product choice soars to 759, while borrowers with 40% deposits can choose from 780 deals.
Of course, mortgage rates are also considerably more favourable for those with higher deposits. The average two-year fixed rate with a 60% LTV is now just 4.96%, while the average rate for a five-year fix is just 4.79%. Depending on your circumstances and the level of fee you pay, you could secure a rate below this figure.
Remortgage activity “will be booming”
With millions of borrowers due to come off fixed rate mortgage deals in 2025, Moneyfacts says “remortgage activity will be booming” this year. Although mortgage rates are higher than they were pre-2022, they are at a much more ideal level for those looking to remortgage than they were last summer.
Rachel Springall, finance expert at Moneyfacts, said: “There was a mix of rises and falls during 2024 and it will be hard to predict where interest rates might go this year, particularly should stubborn inflation persist.
“However, there were big expectations for fixed mortgage rates to fall, but this could take longer should the markets be unsettled and if swap rates start to rise. Lenders may be cautious in their rate setting but they need to make efforts to entice new business and act quickly if there is volatility on future rate expectations.”
The shelf life of products at current mortgage rates is 21 days on average, which is the same as last month and represents stability in the market. While it is difficult to predict where mortgage rates will go this year, Rachel thinks it is unlikely that there will be mass product withdrawals this year; instead, mortgage rates could fluctuate.
She added: “Therefore, it’s wise for borrowers to not delay refinancing their deal, as falling onto a revert rate would be costly. Those coming off the average five-year fixed deal from January 2020 would have been charged 2.74%, but the average Standard Variable Rate (SVR) is now 7.81%, more than 5% higher.”
