Mortgage Market Update – Narrowing Gap Offers New Opportunities

As we step into 2025, there’s positive news for borrowers seeking fixed-rate mortgages. The pricing gap between the average two-year and five-year fixed rate mortgage has shrunk to its smallest margin in two years. This shift could provide greater flexibility and product choice for those exploring their mortgage options.

According to data from Moneyfacts, the overall average two- and five-year fixed rates experienced slight declines at the start of January 2025, with the two-year fixed rate dropping by 0.04% to 5.48% and the five-year fixed rate decreasing by 0.03% to 5.25%. This trend continues a year-on-year improvement, as the five-year fixed rate was 5.55% in January 2024, compared to the current 5.25%. Meanwhile, the two-year fixed rate has seen a notable reduction of 0.45% over the same period, down from 5.93% to 5.48%.

Increased Product Choice for Borrowers

In addition to declining rates, product availability has improved significantly. Borrowers now have access to 6,508 mortgage products, up from 5,899 at the beginning of 2024. This expansion in product choice offers homebuyers and those looking to remortgage more opportunities to secure competitive deals.

What’s Driving the Change?

The narrowing gap between two- and five-year fixed rate mortgages comes amid uncertainty regarding future interest rate cuts. While some analysts anticipate rate reductions in the coming year, others caution that persistent inflation could hinder significant decreases in borrowing costs.

Rachel Springall, a finance expert at Moneyfacts, highlighted the potential benefits for borrowers: “Borrowers who prefer to lock into a shorter-term mortgage may be pleased to see that the rate gap between the average two- and five-year fixed mortgage has dropped to its lowest margin in two years. However, it remains the case that the average five-year mortgage rate is lower than its two-year counterpart, which may be more enticing for those who want peace of mind for longer when it comes to their monthly mortgage repayments.”

What’s Next for Mortgage Rates?

Springall also noted that predicting future rate trends remains challenging. Although there were significant expectations for fixed mortgage rates to fall further, market volatility and rising swap rates could slow this process. Lenders, therefore, may need to carefully balance their rate-setting strategies to attract new borrowers while navigating a potentially turbulent economic environment.

Implications for Homebuyers and Remortgagers

For the millions of borrowers due to come off fixed deals in 2025, this evolving mortgage landscape presents both opportunities and challenges. With increased product options and competitive five-year fixed rates, those looking to remortgage can take advantage of improved terms. However, the uncertainty surrounding interest rates underscores the importance of seeking expert advice and considering long-term financial stability when choosing a mortgage.

Conclusion

While the mortgage market continues to evolve, the current narrowing pricing gap between two- and five-year fixed rate deals offers encouraging signs for borrowers. Whether you’re a first-time buyer or looking to remortgage, staying informed about rate trends and product availability is crucial in making the best financial decision for your future.

If you’re considering your options or need expert advice, get in touch with us at Hattons Estate Agents who could put you in touch with our partner brokers. We’re here to guide you through every step of your property journey.

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