January 31, 2025 4:23 pm

Insert Lead Generation
Nikka Sulton

Three-year fixed-rate mortgages are becoming an increasingly popular option, despite being less common than the more traditional two- or five-year deals. What makes them particularly attractive right now is that they are now the cheapest mortgage products available on the market.

Lenders are believed to be targeting borrowers who are reluctant to commit to a two-year fixed deal due to its higher interest rates, but also don’t want to be tied into a longer-term five-year mortgage. This is especially true for those who believe that interest rates could fall in the coming years, and thus prefer the flexibility that a shorter-term deal provides.

The lowest rate currently available is a three-year fixed deal from MPowered Mortgages, which offers an interest rate of 4.07%. This rate is locked in for three years, and the arrangement fee stands at £999.

For a typical £200,000 mortgage with a 25-year repayment period, this deal would result in monthly repayments of £1,064. This makes it a competitive option for those who want to secure a lower rate while maintaining some level of flexibility.

When compared to the current two-year and five-year fixed deals available on the market, the MPowered Mortgages deal stands out. The lowest two-year deal available is offered by First Direct at 4.23%, and the lowest five-year fix comes in at 4.13%. Both of these rates come with a lower arrangement fee of £490, but they are still more expensive than the three-year deal offered by MPowered Mortgages.

Ravesh Patel, director and senior mortgage consultant at broker Reside Mortgages, explained that lenders are increasingly targeting borrowers who are looking for a balance between securing a competitive interest rate and retaining the flexibility to adapt to market changes. This flexibility is especially crucial in a time when many borrowers are uncertain about the direction of future interest rates and are looking for more adaptable mortgage options.

For those who are unsure about how long they want to be tied to a particular rate, the three-year fixed deal offers a middle ground between the two-year and five-year options, making it an appealing choice for many borrowers in the current market.

The availability of the top mortgage rates is often reserved for buyers with the largest deposits, typically around 40 per cent of the purchase price. However, this situation highlights a growing trend: the price gap between shorter-term fixed rates and five-year deals is gradually narrowing.

Before the rise in interest rates in 2022, mortgage borrowers could generally expect that shorter-term fixes would offer lower rates. It was a standard rule of thumb that the shorter the term of the fix, the cheaper the interest rate would be.

Yet, over the past few years, this pattern has been upended. In fact, lenders have increasingly priced shorter-term fixed rates higher than five-year deals. This shift occurred because many lenders and customers believed interest rates would decrease significantly in the near future, making five-year deals less attractive. As a result, banks needed to adjust their pricing strategies to make longer-term products more appealing.

According to data from Moneyfacts, the last time the lowest three-year fixed rate was priced below the lowest five-year deal was in January 2022. At that time, the lowest three-year deal stood at just 0.94 per cent, while the lowest five-year deal was slightly higher at 0.99 per cent.

This historical comparison shows how the dynamics of mortgage pricing have changed, especially as the market adapts to new economic conditions and fluctuating interest rates. It’s clear that the landscape for fixed-rate mortgages has become more complex, and borrowers are now seeing more competitive rates across different fixed periods than in the past.

The narrowing gap between two-year and five-year fixed-rate mortgages can also be observed when looking at the average mortgage rates across the market.

Between May and July of last year, the average two-year fix was typically 0.4 to 0.5 percentage points more expensive than the average five-year fix. However, as of now, this premium has significantly decreased, with the difference dropping to around 0.2 percentage points.

The trend extends to three-year fixed-rate mortgages as well. These are now largely on par with five-year deals. Currently, the average three-year fix stands at 5.34 per cent, while the average five-year fix is just slightly lower at 5.32 per cent.

Despite the narrowing gap, three-year fixed-rate deals are still relatively less common in the market. Not all lenders offer them, and they make up a smaller portion of the mortgage products available. In fact, there are only 587 three-year fixed-rate mortgages available out of a total of 6,504 residential mortgage products, accounting for just 9 per cent of the market.

This data highlights how the landscape of mortgage deals continues to evolve, with three-year fixes becoming a more competitive option for borrowers, despite their less frequent availability.



Who takes a three-year fixed mortgage? 

Patel has observed the narrowing gap between two-year and five-year fixed-rate mortgages in recent months.

He attributes this shift to the market’s anticipation that interest rates may have already peaked and could potentially decrease in the coming years. “Lenders seem to be pricing in the possibility of Bank of England base rate cuts further down the line, which makes shorter-term fixes comparatively more attractive,” Patel explained.

However, he also pointed out that the market still faces volatility. “In the last few days, we have seen some lenders increasing their rates,” Patel noted. Despite this, he highlighted that some three-year fixes are now even lower than five-year deals, which could encourage more homeowners to opt for shorter fixes. “This could certainly appeal to those who believe they might be able to remortgage at a lower rate in a few years.”

While Patel acknowledged that two-year and three-year fixes would likely attract borrowers hoping for lower rates in the future, he emphasised that the five-year fix remains the preferred choice for many households and homebuyers.

“It’s important to recognise that many borrowers remain cautious due to the broader economic uncertainty,” he said. “While we are seeing increased interest in two and three-year deals, a significant number of customers – particularly those prioritising stability in their household budgets – are still choosing five-year fixes for peace of mind.”

Patel also mentioned the cost-of-living crisis and concerns over long-term affordability, explaining that for many borrowers, locking in a predictable rate is still the preferred option. “Another reason why a five-year fixed rate has a premium is because many lenders now allow for greater borrowing on a five-year fixed-rate product.”

 

 

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}
>