Fix your mortgage rate under 4% for five years!

The popularity of cheap fixed-rate mortgages is starting to gather pace. Check out all the best-buy deals here.

The popularity of fixed-rate mortgages has climbed to its highest level so far this year. In fact, according to the latest figures from the Council of Mortgage Lenders (CML), 48% of new borrowers went for a fixed-rate deal in June.

In the last few years, fixes have fallen from grace as a consequence of the ultra low base rate. Rates on variable deals, particularly base rate trackers, fell dramatically and became more attractive with little prospect for rate rises in the short-term.

But this year, fixed-rate deals are becoming more keenly-priced and, not surprisingly, they’re starting to catch borrowers’ eyes once again.

Interest rates

On top of that, the consensus on the future of interest rates has weakened. Many predicted the base rate would stay at its 0.5% rock bottom level for many months to come. But experts, who are convinced a sustained recovery in the UK economy will occur sooner rather than later, predict the base rate will return to normal levels earlier than expected. You can read more about the debate in The future of interest rates: What the experts say.

If rates start to climb in the near future, there’s a compelling argument for locking into a low fixed rate now. But just how good are the best-buy deals?

The tables below highlight the best fixed-rate mortgages over two, three and five-year terms. They have been ordered by ‘true cost’ rather than rate. The true cost refers to the total amount you would have to repay over the length of the deal including the monthly repayments and all applicable mortgage fees.

It’s important you choose a mortgage on the basis of true cost rather than taking the headline interest rate into account alone. Many of the lowest fixed-rate deals charge extortionately high product fees for arranging the mortgage. Don’t forget, an excessively large product fee can turn a mortgage deal which looks highly competitive on the surface into very poor value.

With that in mind, here are the best-buys over two years:

Top two-year fixes (by true cost over two years)

Source: Moneyfacts.

For those of you who are looking for a short-term fixed rate, there are some fantastic deals on offer which scrape in at under 3%. The cheapest deal by true cost over the next two years is from HSBC which provides a fee-free deal with a fixed rate of just 2.99%. Bear in mind, this is only available up to a maximum loan-to-value of 70%, meaning that you need a deposit or equity stake in your property of at least 30% to qualify.

This isn’t the lowest rate on the market. You’ll find that at Alliance & Leicester where there’s a tiny two-year fixed rate of 2.64%. But this deal comes with a rip-off product fee of 2% of the advance, which means if you were to borrow say £150,000, the cost of arranging the loan would run to a whopping £3,000. So, in terms of true cost, HSBC is the more superior deal by far.

Let’s take a look at the top three-year fixes next:

Top three-year fixes (by true cost over three years)

Source: Moneyfacts.

As you would expect, the rates are higher if you decide to fix over a longer three-year period. This time ING Direct (UK) offers the cheapest deal with a rate of 3.89% and a product fee of just £195. Again, you’ll see this isn’t the lowest rate, but the competitive fees make it the top choice.

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The question you need to ask yourself now is whether you want to fix over a two or three year period. The top rates are extremely attractive, but you’ll need to consider where interest rates might be at the end of the fixed term.

If you think there’s a good chance the base rate will have returned to normal levels in two or three year’s time, fixing over these periods could be risky. After all, by the time you come to remortgage the rates on new fixes at that time, and indeed in relation to tracker mortgages, could be considerably higher than where they are today, leaving you in payment shock as you face a significant hike in your monthly mortgage costs.

Of course, I can’t predict when the base rate will move, or how quickly. But, I think it’s probably safer to go for a five-year fix instead, giving you the opportunity to lock into a very low rate for the longer term. Let’s check out the best deals now:

Top five-year fixes (by true cost over five years)

Source: Moneyfacts.

Once again HSBC has come up trumps with a five-year fix at under 4%. I think this is a great deal by any measure and provides real value for money. But there’s a drawback in that it’s only available at a maximum loan-to-value of 60%. In other words, the deal is only open to borrowers with a minimum of 40% equity in their homes.

If you have an equity stake or a deposit of 25%, you would be better off with the deals from Yorkshire BS where rates of 3.99% and 4.29% are available.

Trackers

Of course, you may prefer to take a gamble with a super low rate tracker on the assumption that interest rates will remain low for the foreseeable future. The table below shows the best trackers by true cost over a range of terms:

Top trackers (by true cost over two years)

Source: Moneyfacts.

It’s a fact that you’ll enjoy exceptionally low repayments with a best-buy tracker, at least until the base rate moves. HSBC offers the best value with its lifetime tracker at just 2.19% (base rate + 1.69%) which comes with a cheap product fee of £99.

Not only will you enjoy a great rate with this deal, but it also comes with another essential feature: No early repayment charge. If the base rate rises to a point where you’re no longer comfortable with the level of your monthly repayments, you can remortgage at any time without triggering an exit penalty.

Compare mortgages at lovemoney.com

More: Beware of this rip-off mortgage cost | Get a mortgage at 1.99%

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 4045 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 discounted 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.