Why a three-year fixed rate offers a 'good compromise' between short- and long-term deals

Posted 13 April 2016 by Nick Parkhouse

Having so many products to choose from has led to more uncertainty about what sort of fixed-rate mortgage might be best for homeowners to choose...

If you are thinking of choosing a fixed-rate mortgage, deciding what type of deal to pick can be tough.

Two-year fixed rate deals offer exceptional rates but you will have to review your arrangements sooner than with other products and potentially just as interest rates start to rise. Pick a five-year deal, however, and while you benefit from medium-term stability you will pay a higher rate. You also have the inflexibility of being committed to the deal - often with high early repayment charges - for half a decade.

Now, a leading expert has suggested that three-year fixed-rate deals may offer an excellent compromise - and there are 82 more deals to choose from than there were just two years ago.

Three-year deals offer excellent value and security

New research has found that the choice and cost of three-year fixed-rate mortgage deals has improved significantly in the last two years. More and more lenders are now offering this type of product which provides both medium-term security and excellent value.

Financial analysts Moneyfacts have found that the number of three-year fixed-rate deals has grown by 16% since 2014, up from 442 in April 2014 to 524 today. During the same period the average cost of a deal has fallen sharply, from 3.97% two years ago to just 2.90% today. 

"Mortgage customers are faced with a conundrum," explains finance expert Charlotte Nelson. "Many want to benefit from the market's record-low rates but are often wary of locking into a deal for five or more years in case their situation changes. A three-year deal could therefore be a good compromise."

Three-year deals hardly any more expensive than two-year products

The research has also found that borrowers won't pay a huge premium for an additional year of security.

While two-year deals may be more popular, the difference in cost between the average two-year fixed deal at 60% loan-to-value and a three-year version is now only 0.22%. Based on a £200,000 mortgage over a 20-year term (on a capital and interest basis), the three-year deal is just £21.54 a month more expensive.

“Three-year fixed rates often get pushed to the wayside in favour of a two or five-year deal,” adds Nelson, “but borrowers looking at mortgages today should not overlook this option as they could be missing out on some great deals.”


Click here to see your activities