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Fix your mortgage for 5 years to beat inflation

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Mortgage borrowers are being urged to consider five-year fixed deals as a way of inflation-proofing part of their monthly outgoings.  

Strong competition among lenders has seen rates in this part of the market plummet.

The average five-year fixed rate mortgage at 75% loan-to-value (LTV) has fallen by 0.32% in the past year from 2.89% in April 2016 to 2.57%, according to data firm Moneyfacts.

Rates on five-year fixes have been improving for some time.

Two years ago the average rate at 90% LTV was 4.41%, whereas it now stands at 3.37%.

Charlotte Nelson, finance expert at Moneyfacts, said: “With inflation rising above the Bank of England target for the first time in four years, it is easy to see that even if the Bank doesn’t raise rates just yet, rising costs will soon take their toll on people’s pockets. Five-year fixed mortgages can play a vital role in protecting borrowers from the rising cost of living.”

Borrowers on standard variable rates (SVR) could find themselves significantly better off by switching to a five-year fix.

Based on the current average SVR of 4.56%, borrowers moving to a five-year deal at 60% LTV would be £232 a month better off – based on a £200,000 mortgage over a 25-year term.

Average five-year fixed rate
Apr-16 Oct-16 Apr-17
60% LTV 2.60% 2.46% 2.39%
75% LTV 2.89% 2.73% 2.57%
90% LTV 3.69% 3.53% 3.37%
Source: Compiled: 3.4.17

Andrew Montlake, director of mortgage broker Coreco Group, said his firm has seen a ‘definite uptick’ in customers looking at taking a five-year fixed rate.

“For those who are concerned that an increase in rates over the initial period of their loan would start to bite, a five-year fix gives a certain peace of mind that many borrowers find invaluable,” he said.

“This is also coupled with the fact that some lenders’ affordability stress tests are less stringent on a five-year fixed, which can provide that extra boon for borrowers who are trying to obtain their dream home.”

He also pointed out that fees added on to loans have also increased, so paying a new product fee every two years can add up.

“This is something that must also be taken into account when assessing which products are best for you,” he said.

Simon Collins, product technical manager at broker John Charcol, said cheaper rates was one reason five-year fixed rates were more popular than their two year counterparts among his client base last month.

“Barclays in particular reduced its 60% five-year deals to start at 1.75% up to £500,000 and 1.70% above [£500,000].”

He also pointed to rising inflation, which he said was bound to be a “concern for the so-called ‘just about managing’ households”, and the triggering of Article 50 as reasons why people were looking for the security of five-year deals.

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