Fix for 5 years at under 4%

We're big fans of five-year fixes and now the most competitive deals have dropped to amazingly low rates.

Here at lovemoney.com, we’re pretty keen on longer-term fixed rate mortgages. Of course, they’re more expensive than trackers and short-term fixes. But we think locking into a relatively low rate now, before rates in general take off, makes good financial sense for many borrowers.

Even better, it’s pretty astounding to see the best five-year fixes have now dropped below 4%. This makes the decision whether to fix even easier for borrowers when deals this competitive are coming onto the market.

Why are fixed rates falling?

I really think a mortgage rate under 4% for the next five years is a great deal by any borrower’s standards. But why have they become so cheap?

It’s all to do with funding costs. The funding of fixed rate mortgages is determined by swap rates. In simple terms, swap rates are a mechanism lenders use to ensure their profit margins remain stable. So, it follows when swap rates alter, fixed rate deals will normally be re-priced accordingly.

It's great news for borrowers that five-year swap rates have fallen steadily throughout 2010. The recent news that the Bank of England may need to resort to pumping more money into the economy through its quantitative easing programme has forced swaps down further. This is filtering through to the lower fixed rates we are seeing today as lenders respond to the reduction in the cost of fixed rate funding.

Profiteering

There’s a possibility more lenders could follow suit if swap rates stay low. That said, earlier in the year, the banks were accused of profiteering when funding costs fell, but the margin between swap rates and mortgage rates widened. Clearly, mortgage rates weren’t being cut at the same pace as falling swap rates. Indeed, lovemoney.com partner Moneyfacts revealed in August that lenders' mortgage margins had hit a record high.  

Today, average five-year swap rates stand at 2.13%. Now given that the lowest five-year fixed rate is 3.69%, there’s still plenty of room for new deals to be priced at even more competitive rates, assuming lenders are willing to do so.

But that’s quite a big assumption. I think there’s a strong case for considering ultra-low fixes now. If you’ve been sitting on your lender’s standard variable rate and biding your time, this could present a perfect opportunity to remortgage to a longer-term fix.

With that in mind, let’s take a look at the most competitive five-year deals:

Top 5 five-year fixes

Source: Moneyfacts. All the deals shown are for remortgages. They are also available to first-time buyers except ING Direct. True cost based on a mortgage amount of £120,000 repayable over 25 years on a property with a value of £200,000.

The table is ordered by the true cost over five years. This takes into account the monthly repayments for each deal - based on a loan of £120,000 on a property with a value of £200,000 repayable over 25 years - alongside the product fees, valuation fees, an estimate for legal fees and so on. True cost is a more accurate way to compare mortgage deals rather than looking at the headline rate alone.

On this basis, the most competitive deal is from First Direct with a headline rate of 3.89%. The low product fee of just £99 for arranging the loan makes this the cheapest option overall. Both ING Direct and Yorkshire Building Society charge the lowest rates on the market of 3.69% but the heavy product fees of £1,945 and £1,495 respectively make these deals around £1,000 more costly compared with First Direct.

You’ll probably have noticed that these best-buys are only open to borrowers who have a large amount of equity in their homes. With the exception of First Direct, they all require a maximum loan-to-value (LTV) of 60%, which means borrowers must have an equity stake of at least 40% to meet the eligibility criteria.

If that doesn’t apply to you, here’s a selection of best-buys at higher LTVs for borrowers with an equity stake of at least 25% (Note this time the mortgage amount is £150,000 rather than £120,000 as in the table above):

Top 5 five-year fixes @ 75% LTV

 Source: Moneyfacts. All the deals shown are for remortgages. They are also available to first-time buyers except Leeds Building Society. True cost based on a mortgage amount of £150,000 repayable over 25 years on a property with a value of £200,000.

Is a five-year fix the right choice for you?

If the question was only a matter of rate, you could reasonably say those borrowers who think rates will stay low should choose a tracker, while those who believe they will start to climb in the near future should go for a fix instead.

Recent question on this topic

• pghargi asks:

  To fix or to track?

  • 
    MikeGG1 answered "I would be inclined to track at the moment. I would definitely avoid a short fix. The rates..."
  • 
    TheWelshman answered "Hi Guys I think MikeGG1 has given some good advice. Short term fixed rates are really not worth it..."
  • Read more answers

But this is problematic for two reasons: Firstly, it’s actually pretty difficult to predict which way interest rates will move. One school of thought suggests rates will remain low to stave off deflation, while the other argues rates could rise sooner than expected because the economy is currently growing at its fastest pace for a decade.   

The second issue is whether you, as a borrower, would be happier with the stability fixed rates provide, or whether you’re prepared to take a gamble on rates staying low with a tracker. Personally, I think now is a good time to take advantage of the most competitive longer-term fixes. After all, there won’t be any need to remortgage for the next five years, and if you can meet the loan-to-value requirements, you’ll get a fantastic rate too.

More: Pay 1.99% on your mortgage - but hurry! | Eight spine-chilling facts about your future costs

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.