The most popular mortgages in the UK are now at their highest rates in five months, causing more turmoil for homebuyers.

The average rate for a five-year fix are at 5.3 per cent today (20 January), according to Moneyfacts. Over half of UK’s homeowners are on such a deal, data from the Bank of England show.

Meanwhile, the average two-year fixed mortgage deal stands at 5.52 per cent.

Rates were last this high in August 2024, when the average two-year rate was 5.77 per cent and it was 5.38 per cent for a five-year fix.

The gap between the two rates is closing, creating a headache for those buying or remortgaging.

Experts say lenders have been trying for months to keep their rates competitive and not pass higher costs onto homebuyers, but turbulence in the markets has forced some of them to up rates in recent weeks.

Rachel Springall, finance expert at Moneyfacts, said there was “uncertainty” last week around the future of interest rates with many lenders still acting with “caution”.

“There were indeed some lenders increasing fixed rate deals, but there were also a mix of lenders reducing rates, withdrawing deals, and launching new ones,” she told The i Paper.

“Borrowers will no doubt be anxious on whether rates will come down in the months to come, particularly if they are one of the many looking to remortgage.”

Recent economic turmoil has led to swap rates, which underpin the pricing of fixed-rate mortgages, edging upwards with major lenders including HSBC, TSB and Virgin Money increasing their rates.

Despite concerns rates will continue to rise, Nick Mendes, mortgage technical manager at John Charcol, believes five-year fixes will improve.

“Lenders had done well to continue holding pricing to the extent they have and these recent increases amongst the high street lenders are essential to safeguarding their margins and service levels,” he said.

“This does not mean, though, we are in for a rough period of continuous increases and I am sure if markets hold firm, we should see a reversal in today’s rate increases notices.”

Further base rate cuts by the Bank of England are predicted this year, with financial markets pricing in two to three cuts.

David Hollingworth, associate director at L&C Mortgages, says there is a “broad spread of opinion” on how quickly the Bank may cut rates and how deeply.

Rate cuts could lead to more competition among lenders and therefore better rates for customers.

Some 1.8 million mortgage holders will be coming off their fixed rates this year – and many will be transitioning from rock-bottom five-year deals of less than 2 per cent.

For those looking to take out a mortgage in the next few months, Ms Springall cautions that the lowest rate deals are not always the best choice.

“Those with limited disposable income would be wise to consider a deal based on its overall package,” she said.

“Incentives and low product fees can help borrowers save money on the upfront cost of any deal, and using a broker is a good idea to assess all many options out there on a true cost basis.”

Is it worth opting for a two-year fix?

Borrowers might also be wondering whether to consider a two-year fix in the hopes rates will drop in the next couple of years.

Two-year fixes are generally more expensive than opting to lock in for five years, but lenders have seen an increase in uptake of shorter fixes in recent years.

Mr Hollingworth says the difference between two and five-year rates is “likely to narrow” so even more people may be drawn to them.

Mr Mendes says a few factors could influence your decision.

“While a two-year fix provides the opportunity to review your mortgage sooner, potentially benefiting from future lower interest rates, it’s essential to plan for the possibility of market changes when the deal ends,” he says.

“Refinancing in two years could mean facing higher rates if market conditions shift unfavourably, so understanding your long-term financial stability is crucial.”

He says two-year fixes can offer more flexibility, which might suit your personal plans, but it will mean you have to renegotiate your mortgage sooner.

You would therefore need to factor in the additional costs of remortgaging more often, including arrangement fees, valuation charges and legal expenses.

He recommends getting professional advice from a mortgage broker or financial adviser, which can “save you time, money and stress”.

Simon Gerrard, managing director at Martyn Gerrard Estate Agents, added:
“Many homebuyers will likely be thinking that they would be better off fixing at a slightly higher rate over the two-year period so they are positioned to lock-in a lower rate for a longer period, in two years’ time, when interest rates should be close to the bottom.

“Of course, the two-year rate is presently higher than a five year, so they may pay more in the short term, but the potential savings are likely to be more than offset when they remortgage at the end of that term.

“That said, the future is never certain, and the world is full of surprises of late, so these purchasers should understand that this approach isn’t without risk.”