Mortgage rates are falling – should you fix for two or five years?

Lenders are cutting mortgage rates and the Bank of England is forecast to reduce interest rates further in 2025. In this environment is it better to opt for a two-year fixed rate or lock in a five-year deal? Gemma Bennett of The Mortgage Mum offers her expert advice…

The current mortgage landscape is more dynamic than ever, and if you’re considering whether to lock into a two-year or five-year fixed rate, it’s likely you will hoping for further Bank of England (BoE) rate reductions before making your decision.

As the market is poised for potential BoE cuts, many borrowers are weighing up the pros and cons of shorter versus longer fixed-rate mortgages.

So I thought I would explore the key considerations to help you make an informed choice.

Will the Bank of England cut rates further?

In recent months, the BoE has signalled the possibility of rate reductions. With inflation starting to ease and the economic outlook beginning to shift, there’s speculation the BoE will cut interest rates again later this year.

For those with variable-rate mortgages or people coming to the end of their fixed deals, this news is certainly noteworthy.

Lower rates could mean more affordable monthly payments in the near future, but the timing of these reductions is unpredictable.

Will they come sooner rather than later? And when they do, how long will they last? These are important questions to consider when deciding how long to fix your mortgage for.

It is important to note, that although the rate rises occurred quickly, it is not expected that rates will reduce at the same speed or land anywhere near as low as they were just three years ago.

A two-year fixed rate – the short-term option

A two-year fix gives you the flexibility to react quickly to changing market conditions. If you’re someone who’s optimistic about the prospect of rate cuts in the near future, a two-year deal might be attractive.

It offers you the security of fixed payments for the short term while keeping your options open when the rates potentially drop.

On the downside, after two years, you’ll be back at square one, possibly facing higher rates if the market doesn’t perform as expected. And remember, even if the BoE does cut rates, lenders may not immediately pass on the savings in the same way.

If you’re someone who prefers stability and doesn’t want to think about remortgaging again soon, the two-year fix may not be for you.

A five-year fixed rate: The stability option

For those who like the peace of mind that comes with long-term stability, a five-year fixed mortgage could be the answer.

With the cost of living still high and market volatility a consistent theme, locking in a rate for five years can offer security against rising costs.

Even if the BoE reduces rates, a five-year deal ensures your monthly payments remain predictable, regardless of market fluctuations. These are currently the products that are priced at the lowest rates too.

However, the main downside is that you might miss out on the potential savings if rates fall significantly within the next couple of years.

Your fixed rate may seem less attractive if the Bank of England cuts rates faster than expected. Additionally, lenders may not be as quick to adjust rates, meaning you could be tied into a higher-than-necessary interest payment during a period of easing.

Which fixed rate is the best option?

How do you feel about taking risks?

Ultimately, your decision will depend on your appetite for risk, your financial situation and your long-term goals.

The answer is always something you need to weigh up against your own individual needs, as there’s never a one size fits all option that suits everyone best.

Risk-averse borrowers

If you don’t like taking risks and prefer the comfort of knowing exactly what your payments will be for several years, a five-year fix provides that security. It’s a safer bet if you anticipate some level of ongoing uncertainty in the economy.

Risk takers

If you’re comfortable with some risk and you believe the BoE’s reductions will come soon, a two-year fix may offer more potential for savings. You can always reassess your options in a couple of years when the landscape is clearer.

Some other points to consider…

No matter what you choose, it’s crucial to seek expert advice from a mortgage broker who understands the nuances of the market and can help you navigate your personal circumstances.

Remember, the rates you see advertised aren’t always the best available to you. Look beyond the headline rate, assess the total cost over the full term and consider any exit fees or early repayment charges.

And if you’re not sure where to start, speaking to someone who can take a step back and offer tailored advice, like a trusted adviser, could be the key to finding a solution that’s right for you.