Right now, 2 year and 5 year fixed-rate mortgages look a bit cheaper than 3 year deals.
The longer the fixed term, the higher the interest rate, right?
If only it was that simple… The only constant is that lenders will always structure their fixed-rate mortgages to strike a balance between risk (which they don’t like) and profit (which they do).
Conventional wisdom says: when lenders expect interest rates to fall over the medium to long term, longer fixed terms come with lower interest rates (though not quite as sharply as the anticipated rate drop). Conversely, if they expect rates to rise, longer-term fixed deals will carry higher rates than shorter ones. Makes sense, doesn’t it?
Now for the weird bit
If you’re currently shopping around for a fixed-rate mortgage, you’ve probably noticed an oddity — three-year deals are more expensive than both two- and five-year ones. Why would that be? It actually makes sense in today’s climate of global financial uncertainty.
Lenders are fairly confident the Bank of England will lower base rates over the next year or so. Even if rates rise again afterward, the risk period is short — so that is manageable for them.
They’re also reasonably confident rates will trend lower over the next five years. Sure, this assumes the world (and you know who) comes to its senses fairly soon.
But it’s the middle ground — three years — where uncertainty looms largest. Will rates rise, then fall? Drop and keep dropping? Drop and then rise again? When lenders aren’t sure, they hedge — and that means higher rates.
So what shoud you do?
Who knows? It ultimately comes down to your appetite for risk, and your view of what’s coming.
If you expect the cost of living to keep rising — tariffs and all — then you might believe interest rates will fall significantly. If you can stomach the risk of being wrong, a two-year deal could make sense, as there will be much cheaper deals come renewal time.
On the other hand, a five-year deal gives you certainty — and time to plan. If you can resist the fear of missing out on ultra-low rates should the world stay pear-shaped, then it might be the better choice.
Either way, it doesn’t feel like a three year fixed-rate mortgages makes sense at the moment.
And whatever you choose, if you’re worried about smug friends and colleagues… well, you’ll get those anyway. There will always be the prescient (read: lucky) ones who made the “right choice at the right time.”
