The interest rate on the typical two-year fixed rate mortgage has fallen below 5 per cent for the first time in almost three years.
The average two-year fixed rate across all mortgage products is now 4.98 per cent, according to rates scrutineer Moneyfacts, slightly below the average five-year deal at 5 per cent.
It means that the typical household fixing a £200,000 mortgage for two years with a 25-year repayment term will be paying £1,167 a month.
The last time average two-year fixed rates were below 5 per cent was in September 2022, prior to the disastrous mini-Budget when Liz Truss was Prime Minister.
The announcement of unfunded tax cuts sent financial markets spiralling and led to a mortgage rate spike, with both average two-year and five-year fixed mortgage rates went above 6 per cent.
They then reached another high of 6.86 per cent in the summer of 2023 due to a combination of base rate hikes and worries over inflation figures, while five-year fixed rates hit 6.35 per cent.
The consensus among brokers is that mortgage rates are likely to continue to slowly fall.
The Bank of England cut the base rate, which influences mortgage rates, from 4.25 per cent to 4 per cent on 7 August.
It means interest rates have dropped by 1.25 percentage points since August 2024 when it was first cut from 5.25 per cent.
Average mortgage rates have been steadily improving since the start of the year and many borrowers can now secure rates below 4 per cent.
For example, someone remortgaging with at least 40 per cent equity in their home can now secure a 3.78 per cent two-year fix with Santander.
Meanwhile, someone buying with a 15 per cent deposit can now get a 3.94 per cent two-year fix with Yorkshire Building Society or a 3.95 per cent deal with Santander.
‘The market feels more settled than it did a year ago,’ said Nicholas Mendes, mortgage technical manager at broker John Charcol.
‘Rates have been edging lower in recent weeks, helped by a fall in swap rates and a wave of competition between lenders.
‘Many banks are behind on their annual lending targets, so they’re sharpening prices to win remortgage business.
This is why we’re now seeing two and five-year deals dipping below 3.8 per cent, even though inflation is still above target.’
Should you fix for two or five years?
Those about to buy a home or remortgage face a tough decision over what length of fix to go for.
Nicholas Mendes, mortgage technical manager at John Charcol
Santander’s mortgage lending figures suggest a preference for shorter-term fixed rate deals at the moment.
It says that 54 per cent of its customers so far this year have opted for two-year fixes, compared to just 36 per cent opting for five-year deals.
Two-year fixes offer borrowers the chance to lock in for a short period of time in the hope that deals will be cheaper when they next come to remortgage.
Five-year fixes will appeal to those that think the risk isn’t worth taking, accepting there is no guarantee that mortgage rates will be lower come 2027.
Key deciding factors also include whether someone may move home soon, how much they prefer the security of fixed payments for longer, and how well they could cope with a rise in their monthly payments.
For those who feel a two-year deal is slightly too short and a five-year fix too long, there are now also plenty of three-year deals.
‘A two-year fix might appeal if you expect rates to fall further and want the option to re-fix sooner,’ added Mendes.
‘But you also need to factor in the potential cost of multiple arrangement fees and your longer-term plans for the property.
‘Five-year fixes can provide certainty and protect against the risk of rates rising again. It’s less about picking the cheapest headline rate today and more about finding the structure that fits your circumstances and risk appetite.’
Another potential option for borrowers is a tracker mortgage.
Tracker mortgages essentially track the Bank of England base rate, plus a percentage. For example, base rate (4 per cent) plus 0.5 per cent giving an overall rate of 4.5 per cent.
One of the benefits of a tracker is that many come without early repayment charges, and can therefore be paid off or switched away from without penalty.
There is also a growing case for choosing a tracker mortgage given that interest rates are widely expected to fall further over the coming 12 months.
While interest rate forecasts vary, there are plenty of economists and analysts who think rates are headed lower.
HSBC and UBS for instance are forecasting that interest rates will fall to 3 per cent by the end of 2026.
There are also some that think interest rates will stay higher, however. Analysts at Pantheon have forecast that interest rates will finish 2026 at 4 per cent.
Nicholas Mendes thinks that a tracker could be a risk worth taking for some people, though there is no guarantee it will pay off.
‘Trackers can pass on any further base rate cuts straight away, which could work in your favour if rates fall as expected,’ he added.
‘With fixed rates now available below 3.8 per cent, trackers are not automatically the cheaper option at present, so it really comes down to your view on rate direction and your comfort with risk.’
