Longer-term fixed rate deals offer better value to homeowners amid rising interest rates.

The average cost of a two-year fixed rate mortgage has broken through the 4% barrier for the first time in nearly a decade.

The typical interest rate charged on one of the deals is now 4.09%, according to financial information group Moneyfacts. That’s the highest level since February 2013.

The interest on fixed rate deals has risen 1.75% since the Bank of England first started increasing interest rates in December 2021. It’s up by 0.14% since the beginning of August 2022 alone.

While mortgage rates are rising across the board, longer-term fixed rate deals for five or even 10 years continue to offer better value for homeowners.

Why are we seeing fixed rate mortgages rise?


The Bank of England’s Monetary Policy Committee has increased the official cost of borrowing in a bid to combat high inflation.

They’ve increased the base rate by 1.65% since December 2021.

But unlike variable rate mortgages, the cost of new fixed rate deals is not based on the Bank of England base rate.

Instead, fixed mortgages are based on swap rates. This is the cost of borrowing money for a set period of time.

Swap rates are based on a number of different factors, including potential future interest rate changes.

With inflation remaining stubbornly high, further interest rate rises are expected in the months ahead.

That’s why the average cost of a fixed rate mortgage has increased by 1.75% since December, when the base rate has only risen by 1.65%.

What should I do if I need to remortgage?


With two-year fixed rate mortgages starting to look expensive, you may want to consider locking into a mortgage deal for a longer period of time.

You’ll be charged an extra 1.75% on a two-year fixed rate loan on average compared to December 2021.

But it’ll only be an extra 1.6% on a five-year loan, which now stand at an average of 4.24%.

This has led to the premium you’ll pay for the security of fixing for a five-year period, rather than a two-year one, narrowing to just 0.15%. That’s half the level of 0.3% it stood at in December.

If you can lock in for even longer, ten-year fixed rate mortgages also look good value. You’ll be charged an average interest rate of 4.2%, slightly lower than that for five-year deals.

But before you opt for a longer-term fixed rate mortgage, make sure you won’t need to exit the loan early.

Exit penalties on 10-year fixed rate mortgages can be as high as 8% of the outstanding mortgage debt, so think it through before you jump in.

What about tracker mortgage deals?


Tracker rate mortgages currently look cheap compared with fixed rate ones.

The average interest rate charged on a two-year tracker deal is standing at 3.33%.

But remember that the cost of these mortgages moves up and down in line with the Bank of England base rate.

With some economists predicting the base rate could increase to 3% or more, the rate you pay on a tracker mortgage could rise to more than 4.5% in the next few months.


What else do I need to know?


The mortgage market is currently moving very quickly.

Be prepared to move fast to secure a deal that you like the look of.

Lenders have pulled 269 deals since the beginning of the month, with the typical mortgage product only available for 17 days before it is withdrawn.

Eleanor Williams, finance expert at Moneyfacts, said: “We’ve seen lenders withdraw parts of, or entire product ranges, with a number citing the pause in lending being due to unprecedented demand.

“Providers need to manage their service levels following an influx of applications, as borrowers have rushed to secure deals before rates have a chance to climb even further.”

Remember that you can ‘book’ a mortgage rate up to six months before your current one expires.

So, if you are coming to the end of a mortgage deal, try to lock into a new one now, before interest rates rise again.

Key takeaways

  • The average cost of a two-year fixed rate mortgage has broken through the 4% barrier for the first time since February 2013
  • Five-year and 10-year fixed rate deals currently offer better value to homeowners
  • People remortgaging need to move fast, with lenders pulling deals after an average of just 17 days