Are three-year mortgages any good?

Mortgage rates have been super competitive for a while now, but recently lenders have begun to ramp up their efforts to offer cheap rates on three-year deals. 

These have historically been few and far between, with most lenders offering their best rates on two-year and five-year deals – but three-year fixed rates offer a balance between affordability, flexibility and certainty.

Typically mortgages are taken over a 25 to 35-year term but when you sign up, you agree to a promotional rate that lasts for part of this time.

By far and away the most popular type of deal is the two-year fixed rate, which offers borrowers the security of a fixed repayment each month for the two year duration and rates are invariably the cheapest in the market. 

Economists are pricing in a rate rise in 2019 which would push up mortgage rates

Over the past few years, five-year deals have grown in popularity as borrowers opt for slightly higher rates in exchange for a longer period of certainty on what they’ll pay.

Indeed figures from conveyancing firm LMS suggest that over a third – some 37 per cent – of borrowers remortgaging in July fixed onto a five-year deal, the biggest proportion since numbers were first tracked and a massive increase from the 7 per cent who previously had a fixed five-year product. 

Locking into a longer-term fix is attractive if you take the view that mortgage rates are likely to rise in the near future – and consensus among economists is pricing in a rise in the base rate in 2019.

But what if you want the certainty of fixed payments without tying yourself in for the full five years?

Opting to lock in your mortgage payments for five years only makes sense if you plan to stay put in your home for the full period – most lenders charge hefty early repayment charges if you need to get out of the mortgage before the five-year term is up. 

This, combined with price, is usually what drives people to take shorter deals – it offers far more flexibility if you’re not sure whether you’ll need to move in the near future. 

There are mortgages on offer for those who want to fix but think they might need to repay early. For more on fixed rates with no early repayment charges, read our in depth analysis here. 

There is an alternative to the traditional two and five-year deals though – the little known and largely unloved three-year fixed rate.

What’s on offer over three years? 

Figures from personal finance site Moneyfacts put the average three-year fixed rate at 2.52 per cent, which would see a borrower with a £150,000 mortgage over a 25-year term paying £674 a month.

The best three-year deal on the market at the moment is from Halifax at 1.35 per cent, available to those with 40 per cent equity. The deal charges a £1,429 fee at the outset, which can be paid upfront or rolled into the loan.

Monthly repayments for those taking a £150,000 loan on a capital repayment basis over 25 years are £589.

This compares to the cheapest two-year fixed rate from Yorkshire Building Society, which is currently 0.99 per cent up to 60 per cent loan-to-value with a £1,765 fee. On the same terms as above, monthly repayments would  be £565.

The best-buy five-year fixed rate is from Barclays at 2.49 per cent with a £999 fee, available up to 60 per cent LTV. Monthly repayments would be £672.

Rachel Springall, finance expert at Moneyfacts, said: ‘Lenders are currently heating up competition in the three-year sector – likely due to the saturation of competition rates in the two and five-year sector.

‘The ideal length of a fixed-rate mortgage will entirely depend on a borrower’s circumstances; if they feel a five-year deal is too long a commitment but that a two-year deal is too short, then a three-year term could be just right.’

Provider Rate Period Max LTV Min Fee Redemption Incentives
Monmouthshire BS 1.40% 3 years 65% £999 1st 3 yrs: Remortgage customers get free valuation and free legal fees.
Yorkshire BS 1.46% 30/11/2020 75% £995 To 30/11/2020 £250 cashback.
Nationwide BS 1.74% 3 years 85% £999 1st 3 yrs: No valuation fees. First-time buyers and remortgage customers get £500 cashback.
West Brom BS 1.89% 31/10/2020 80% To 31/10/2020 Free valuation fees (Max £445).
HSBC 2.29% 30/09/2020 90% £999 To 30/09/2020 Remortgage customers get free legal fees.
West Brom BS 2.74% 31/10/2020 90% To 31/10/2020 Free valuation fees (max £445). £1K cashback.
Source: Moneyfacts           

There is an added advantage of locking in for three years – most of the cheapest rates on offer charge high application fees between £500 and £2,000. 

If you opt to take three two-year fixes over a six-year period, you might benefit from lower monthly repayments, but you’ll have to stump up three fees.

A five-year deal will see you pay this fee just once by comparison, and the three-year deals would incur two fees. 

You can compare the cost of all these options accurately using This is Money’s true cost mortgage calculator. 

mortgages card best buys

Springall said: ‘If a borrower takes a two-year deal then they will have to stump up the cash to switch their deal at the end of the initial period, which won’t be ideal for those who don’t want both the hassle and cost of moving their mortgage every couple of years.’

Remortgaging can also incur legal and valuation costs – particularly if you switch lender, which collectively could wipe out the ‘savings’ you make on the monthly repayment with a lower rate.

Cutting the frequency of having to remortgage can therefore save you thousands of pounds over the longer term. 

Andy Knee, chief executive of LMS, added: ‘We are seeing a significant change in consumer behaviour when remortgaging. Typically, over the past year, people were remortgaging to save on their monthly repayments or borrow additional funds. 

‘Instead, with rates low and expectations of a rate rise high, people are fixing for longer for added financial security. Borrowers are taking shelter from future rate rises and preparing for potentially turbulent times to come. It’s a flight to financial security.’

True cost mortgage calculator

This mortgage payment calculator will allow you to see the effect of sneaky arrangement fees on your repayments. Use the second part of the calculator to compare deals.