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