An increasing number of homeowners are choosing one-year fixed-rate mortgages rather than committing to longer-term agreements, betting on a decline in interest rates.

One-year fixed-rate options appeal to those who prefer predictable monthly payments while anticipating lower rates in the near future, allowing them to potentially secure more favorable deals down the line.

Mortgage rates began to drop in August following a reduction in the Bank of England’s base interest rate from 5.25 percent to 5 percent.

At the time of this interest rate reduction, the average two-year fixed mortgage rate stood at 5.77 percent, which has since fallen to 5.39 percent.

Experts foresee additional rate cuts, with many economists predicting the base rate could stabilize around 3.5 percent by the end of next year, and some, such as analysts at Goldman Sachs, anticipate a more significant decrease to 2.75 percent.

Given that fixed mortgage rates are influenced by future base rate projections, homeowners nearing the end of their existing contracts face a critical decision: should they commit to a long-term fixed rate or risk short-term rates for potential savings?

“As rates are predicted to decline, opting for a one-year fix allows borrowers the opportunity to remortgage at a lower rate in a year’s time,” stated Nicholas Mendes from broker John Charcol. However, the short-term nature of these deals poses risks, particularly if rates unexpectedly rise.

Current Market Trends

In 2023, the number of borrowers opting for one-year fixed mortgage agreements surged to 54,565, reflecting a 60 percent increase from 34,147 in 2022, based on data from the Financial Conduct Authority.

This trend has accelerated in the first half of this year, with 40,241 homeowners securing a 12-month deal, marking a 69 percent rise compared to the same timeframe last year.

Though less common than two or five-year fixed-rate deals, the availability of one-year options is expanding. These deals are frequently limited to existing customers seeking to remortgage (known as product transfers), with the most favorable rates reserved for those with a higher equity stake.

Santander currently offers the top one-year fixed rate for existing customers at 4.82 percent, requiring a £499 fee and a loan-to-value ratio (LTV) of up to 60 percent. Under these terms, monthly repayments on a £200,000 mortgage over a 25-year period would amount to £1,149.

However, for borrowers with a maximum 95 percent LTV, Santander’s product transfer rate rises to 6.02 percent, leading to monthly payments of £1,291 for the same mortgage term—an additional £142 monthly, translating to £1,704 annually.

Opportunities for one-year fixed deals from other lenders remain scarce, especially for those wanting to switch from a different lender or for new purchases. The most competitive rate available for those looking to buy is 5.57 percent through Hanley Economic Building Society, resulting in monthly repayments of £1,236 on a £200,000 mortgage.

Evaluating the Decision

While one-year fixed-rate mortgages offer flexibility, they typically come at a higher cost compared to two or five-year alternatives.

The lowest two-year fixed rate, available through Nationwide, is currently 3.89 percent, with the best five-year rate at 3.74 percent, also from Nationwide. However, access to these deals is limited to second-time buyers with a minimum 40 percent deposit. Monthly repayments for a £200,000 mortgage on a 25-year term would be approximately £1,044 and £1,027, respectively.

Opting for a two-year deal could result in savings of £1,260 over the first year when compared to the best one-year fixed rate, and £1,464 with the five-year option. In order for a one-year deal to be more advantageous over two years, the lowest fixed rate in a year would need to drop to around 2.9 percent or below, excluding fees.

“Choosing a one-year deal means you’re paying more for the option of flexibility compared to longer fixed rates,” noted David Hollingworth from L&C Mortgages. “However, if rates don’t decrease as anticipated, borrowers risk incurring unnecessary higher costs for that year.”

An alternative could be a tracker mortgage, which offers no fixed duration commitment. These agreements are tied to the base rate, meaning payments will vary with any changes in rates. Typically, there are no penalties for early repayment.

The most competitive base rate tracker currently available is from Halifax, set at the base rate plus 0.08 percentage points. Those qualifying would see an initial rate of 5.08 percent, with monthly repayments of approximately £1,179 on a £200,000 mortgage structured over 25 years, requiring a 60 percent LTV.

“You could find that a tracker mortgage may be more beneficial than a one-year fixed deal, particularly if base rates continue to decline while you’re locked into a fixed rate,” commented Aaron Strutt from broker Trinity Financial.

“Evaluate your capacity to handle the risk that a one-year fix entails if rates do not decrease. If your financial situation permits, it could be a reasonable risk to take.”