Interest rates for two-year mortgages are falling faster than for longer-term contracts

In anticipation of further interest rate cuts, interest rates on shorter-term mortgage loans are falling faster than on longer-term alternatives.

Since Liz Truss’s mini-budget in September 2022 led to a rise in borrowing costs, five-year fixed rates have been cheaper than two-year fixed rates.

However, the average two-year fixed rate has fallen faster than the five-year average over the past year due to falling swap rates, according to data from Moneyfacts.

These interest rates are based on long-term forecasts of the future development of the Bank of England’s base rate.

Financial markets now expect the bank to continue cutting interest rates, even though it left the base rate at 5 percent this week.

Economists expect there will likely be one or two cuts this year, bringing the interest rate down to 4.75 percent and 4.5 percent respectively.

As a result, banks have been cutting interest rates in recent weeks. Last week, Santander introduced the first two-year fixed rate below four percent, namely 3.99 percent.

Virgin Money has also cut interest rates on residential property and buy-to-let mortgages by up to 0.2 percentage points to just 3.99 percent.

Experts assume that more will follow.

Nick Mendes of broker John Charcol said: “The gap between two-year and five-year fixed mortgage rates is expected to narrow. By the end of 2024, five-year rates could fall to around 3.5 per cent, while two-year rates are expected to be around 3.8 per cent.”

“As lenders respond to lower financing costs and increased competition, we could see even more attractive mortgage offers.”

After the average fixed rate on a two-year bond rose from 4.74 percent on the day of the mini-budget to 6.65 percent a month later, lenders are competing to lower rates.

David Hollingworth of L&C Mortgages said: “I expect that, while interest rates remain unchanged, interest rates will continue to be adjusted wherever possible to gain an advantage in a highly competitive market.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, added: “Despite the Bank of England taking no action, lenders are still cutting their mortgage rates as they compete for business.”

“Mortgage rates continue to fall. Santander has introduced a two-year fixed rate of under 4 percent, after two-year swap rates were at their lowest level in two years. For those looking for security over a longer period, there are also plenty of five-year fixed rates of under 4 percent.

“Competition among lenders is likely to lead to further modest reductions in mortgage rates as they vie for new business.”

There are several five-year contracts under 4 percent. The best deal currently comes from Danske Bank, which offers an interest rate of 3.76 percent for those who have at least 60 percent deposit or equity.

Most of the best deals are reserved for those with the highest down payment or the most equity, but lenders will also bring more money to the market for those with a lower loan-to-value (LTV) ratio.