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Two- and five-year mortgage rate gap is smallest since 2023

Two- and five-year mortgage rate gap is smallest since 2023
Shekina Tuahene
Written By:
Posted:
13/01/2025
Updated:
14/01/2025

Analysis has shown the gap between the average two- and five-year fixed mortgage rate is at its lowest since January 2023.

The Moneyfacts UK Mortgage Trends Treasury Report found that the average two-year fixed rate is now 0.23% higher than the average five-year fixed rate, at 5.48% and 5.25% respectively. 

The average two-year fixed rate has been higher than its five-year counterpart since October 2022. 

Rachel Springall, finance expert at Moneyfacts, said: “Borrowers who prefer to lock into a shorter-term mortgage may be pleased to see that the rate gap between the average two- and five-year fixed mortgage has dropped to its lowest margin in two years.

“However, it remains the case that the average five-year mortgage rate is lower than its two-year counterpart, which may be more enticing for those who want peace of mind for longer when it comes to their monthly mortgage repayments.” 

Lower mortgage rates across the board 

Compared to last month, the average two-year fixed rate has fallen by 0.04%, while the average five-year fixed rate has dropped by 0.03%. Pricing was significantly lower than this time last year, when the averages were 5.93% and 5.55% respectively. 

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At 95% loan to value (LTV), the average two-year fixed rate was 5.86% in January, down from 5.92% last month and lower than 6.21% a year ago. The average five-year fixed rate was 5.47%, compared to 5.53% at the end of last year and 5.62% in January 2024. 

For an average two-year fix at 90% LTV, the rate was 5.75%. This was down on 5.94% last year and 5.8% a month ago. The typical five-year fixed rate also fell to 5.36%, compared to 5.4% in December and 5.65% in January last year. 

Across the 60% LTV tier, the average two-year fixed rate was 4.9%, compared to 5.04% in December. This was also lower than the average rate of 5.41% a year ago. 

For an average five-year fixed rate for borrowers with a 40% deposit or equity, this came to 4.79%. This was lower than the average of 4.86% a month earlier and 5.06% a year ago. 

The average standard variable rate (SVR) came to 7.81% in January, slightly lower than the average of 7.85% in December. This was also down on the average of 8.18% last year. 

Meanwhile, the average two-year tracker rate was 5.47%, a nominal increase on 5.46% in December but lower than 6.15% in January 2023. 

Springall 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. There are millions of borrowers due to come off fixed deals, so remortgage activity will be booming in 2025.” 

Product shelf life stable as choice increases

In January, the average shelf life of a mortgage product was 21 days, unchanged from December. This was also the same as the same month last year. 

There were more products on the market, totalling 6,508, up from 6,486 in December. Choice was also improved from the 5,899 options on the market last year. 

There was just one more product available at 95% LTV compared to last month, coming to 366 options. However, there was more choice than at the start of last year, when there were 270 deals at 95% LTV. 

There was a small fall in the number of 90% LTV products available, coming to 759 in January compared to 762 the month before. Again, this was higher than the same time last year, which saw 733 options at this tier. 

At 60% LTV, the product count ticked up from 778 in December to 780 in January. This was higher than the 682 deals on the market in 2024. 

Springall added: “Mortgage activity remained calm during December as the average shelf life remained at 21 days. Despite the calm, fixed rates did see marginal cuts across most loan-to-value brackets and there was a slight rise [in] product choice. Stability in choice is good news to borrowers who may be concerned about product availability as we enter 2025. Indeed, the turmoil of the 2022 fiscal announcement saw an unprecedented [number] of mortgage deals pulled from the market.

“It is hoped that there will not be a repeat of such upheaval in choice; it is much more likely to expect rates to fluctuate rather than mass product withdrawals. 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 SVR is now 7.81%, more than 5% higher.” 

This article was first published on YourMoney.com‘s sister site, Mortgage Solutions. Read: Two- and five-year mortgage rate differential at smallest since 2023 – Moneyfacts