For the first time since Liz Truss’s “mini” Budget in 2022, borrowers in the UK can now secure a cheaper two-year fixed mortgage deal compared with a five-year option. This marks a significant shift in the market and reflects changing expectations among traders about the direction of interest rates over the coming months.
Figures from financial data provider Moneyfacts show that the average two-year fixed rate last week stood at 5 per cent. By comparison, the average rate for a five-year fixed deal was slightly higher at 5.01 per cent. While the difference may seem minimal, it is notable because for much of the past two years, longer-term mortgages had been offering better value.
According to Pete Dockar, chief commercial officer at specialist lender Generation Home, the gap in rates tells an important story about market sentiment. He explained that money markets now expect a gradual decline in interest rates in the short term, but also anticipate that in the longer term, the Bank of England’s base rate will settle back to around 4 per cent.
For many years before the turbulence of 2022, it was normal for shorter-term mortgage deals to cost less than their five-year equivalents. Borrowers would often choose the shorter term to secure a lower rate, even if it meant potentially facing a higher rate when their deal expired. The reversal of this pattern in recent years was largely due to market instability and uncertainty over inflation.
The return to this historical norm comes in the wake of the Bank of England’s recent decision to cut the base interest rate by 0.25 percentage points, bringing it down to 4 per cent. This move was made despite inflation remaining above target, as economic growth across the UK continues to stagnate.
One senior figure at a major high street bank described the current “rate inversion” — where shorter-term deals cost less — as a sign that markets expect interest rates to fall steadily over time, rather than dropping sharply in the near future. This cautious optimism has already started to filter through to mortgage pricing.
Rachel Springall, finance expert at Moneyfacts, offered a measured perspective. She noted that while the market no longer expects a series of aggressive rate cuts, the latest figures will still come as a welcome relief to many homeowners whose fixed-term mortgages are coming to an end.
For borrowers on variable-rate deals, the base rate cut will bring an almost immediate reduction in monthly payments, since these deals are directly linked to the Bank of England’s rate. This could provide some short-term breathing space for households facing cost-of-living pressures.
The shift also presents a new decision for borrowers who are currently looking for a mortgage. Many will now be weighing the benefits of choosing a cheaper two-year deal against the security of locking in a rate for five years, even if that comes with a slightly higher cost.
Dockar explained that this choice ultimately comes down to an individual’s circumstances. A short-term fix may allow borrowers to take advantage of falling rates sooner, but it also carries the risk that rates could rise again by the time the deal ends. In contrast, a longer-term fix offers stability and protection from future increases, but borrowers will pay a premium for that certainty.
Historically, longer-term mortgage rates have always been priced higher. This reflects the fact that lenders take on more risk by committing to a rate for an extended period, while borrowers value the reassurance of fixed payments for several years.
However, this normal pricing structure was disrupted in September 2022 following the “mini” Budget announced by then-Chancellor Kwasi Kwarteng. The announcement of large tax cuts and increased government borrowing caused market volatility, sending interest rates soaring almost overnight.
At that time, five-year mortgage rates dropped below two-year rates as lenders sought to encourage longer-term borrowing to manage risk. This unusual situation persisted for nearly two years, until the recent adjustment in market conditions brought the balance back towards historical norms.
A representative from one high street bank said the latest changes would not significantly affect lenders’ profitability. Mortgage margins, they explained, are determined by the difference between what customers pay and the cost to the bank of funding the loan. Both two-year and five-year deals are influenced by the same funding trends, meaning their rates tend to move in parallel.
For borrowers, the message is clear: the mortgage market is once again shifting, and the traditional structure of cheaper short-term deals appears to be returning. Whether to take advantage of this now or secure long-term certainty is a personal choice, but with rates expected to change gradually, the decision could have a notable impact on household finances in the years ahead.
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