"Despite the average rates increasing for two and five-year fixed mortgages since reaching record lows in July 2020, the gap between the two today is even lower at 0.17%"
The rate gap calculates the difference between the average two and five-year fixed rates. The data shows that at 0.27%, the annualised average rate gap for 2020 is the lowest Moneyfacts has recorded since 2013, down by 0.09% compared to the average of 0.36% for 2019 and much smaller than the 0.64% of 2016.
Looking at the rate gap for today only, this has shrunk to just 0.17%, the lowest the daily gap has been recorded at since June of 2013, around a year after the Government launched its Funding for Lending Scheme, which instilled rate competition in the market.
Eleanor Williams, finance expert at Moneyfacts, said: “Despite 2020 being one of the most turbulent years the mortgage sector has faced, including a period of enforced shutdown for the property market in spring, recent HMRC data shows that the provisionally estimated transaction levels for December 2020 are 31.5% up on December 2019, and have risen by 13.1% compared to November 2020. While some of this surge may be explained by borrowers rushing to meet the stamp duty holiday, there will be other borrowers who may have re-evaluated what they want from their home after enforced periods within their four walls, and who are starting 2021 by considering their mortgage options.
“The annual average two-year fixed rate over 2020 was 2.28%, meaning the rate gap, when compared to the annual average five-year fixed rate of 2.55%, was just 0.27%. This is a low not equalled since 2013, which followed the launch of the Funding for Lending scheme in 2012 and implies that although the cheap funding schemes are drawing to a close, the low base rate environment and demand from borrowers means that lenders are keen for business. It is interesting to note that, despite the average rates increasing for two and five-year fixed mortgages since reaching record lows in July 2020 (1.99% and 2.25% respectively), the gap between the two today is even lower at 0.17%, which is even more positive for potential borrowers considering longer-term fixed rates.
“Historically, two-year fixed products have been popular with borrowers, however while the economy remains full of uncertainty, some may find themselves ultimately better off with a five-year fixed rate mortgage. Although five-year deals generally carry higher rates than their two-year equivalents – as borrowers are effectively purchasing the longer-term stability and protection from future interest rate increases these provide – with the gap between the two options currently so low, this may be an opportune time to secure the peace of mind a longer-term fixed rate can bring."
