Cheaper short-term loans mark first inversion since 2022
UK homeowners can now secure a cheaper two-year fixed mortgage than a five-year deal for the first time since Liz Truss’s September 2022 “mini” Budget as markets anticipate gradual interest rate cuts.
Figures from Moneyfacts show the average two-year fixed rate stood at 5.00% last week, just under the 5.01% average for five-year fixes. Mortgage experts say the shift reflects money market expectations that rates will fall slightly in the short term but remain around 4% in the longer run.
Impact of Bank of England rate cut
The change follows the Bank of England’s decision to trim its base rate by 0.25 percentage points to 4%. Despite stubborn inflation, the Bank has moved towards easing policy in response to sluggish economic growth.
Pete Dockar, chief commercial officer at lender Generation Home, said the return of cheaper short-term borrowing was historically normal. “The question for consumers now is do you go for a short-term rate which is a bit cheaper, or do you lock in for the long term but pay a premium for it,” he said.
Borrower incentives shift
The inversion between short and long-term rates is expected to influence decisions among homeowners whose fixed-rate deals are ending. With short-term mortgages now marginally cheaper, many are likely to opt for a two-year fix, hoping to refinance again if rates fall further.
Borrowers on variable-rate deals will also see immediate benefits from the Bank’s cut, as their payments are directly linked to the base rate.
Long-term rates still carry a premium
Historically, five-year and longer fixed deals have cost more, offering borrowers stability while lenders price in higher credit risk over time. That pattern was disrupted in the aftermath of the 2022 “mini” Budget, when gilt yields and swap rates surged, pushing up short-term borrowing costs disproportionately.
Rachel Springall, finance expert at Moneyfacts, said the current rate structure suggested markets were not anticipating “loads more” cuts in the near future, but rather a steady, measured reduction in borrowing costs.
Minimal hit to bank margins
A source at a major high street bank said the switch in relative pricing between two and five-year deals was unlikely to dent profitability. “Banks make a margin on mortgages based on the customer rate minus the cost of funding the product. The customer rate is determined by that cost of funding – so the trends in both two years and five-year rates mirror how much those loans are costing,” they said.
For now, analysts say the shift is a small but significant signal of market sentiment – and a welcome reprieve for homeowners squeezed by the sharp rate rises of the past two years.
