Two-Year or Five-Year Fix? How to Work Out Your Break-Even Rate

Paying more now, expecting rates to fall

Right now some borrowers are offered a two-year fix at a higher rate than a five-year fix, and still lean towards the two-year deal. The thinking is simple: if rates fall over the next two years, they can refinance onto a lower rate when the short fix ends, instead of being locked in for five.

The question is how far rates would actually need to fall. The higher rate on the shorter fix, the arrangement fees on both deals and the cost of refinancing in two years all have to be made back.

The good news is that this can be turned into a single, clear figure: the break-even rate. Once you know it, you can see exactly what you would be relying on before you choose the shorter fix.

What the break-even rate means

Picture two routes over the same five years.

Route one, the longer fix. You take a five-year fix and pay its arrangement fee once. Your cost is five years of interest plus that fee.

Route two, the shorter fix and refinance. You take a two-year fix and pay its arrangement fee. After two years you refinance, paying a refinance fee, onto a new rate for the remaining three years.

The break-even rate is the rate you would need on that new deal for route two to cost exactly the same as route one. If you could refinance below it, the shorter fix comes out cheaper over the five years. Above it, the longer fix does.

How the calculation works

There are three steps.

1. Add up the longer fix. Interest for the full fixed period, plus its arrangement fee.
2. Add up the shorter fix so far. Interest for the shorter period, plus its arrangement fee, plus the refinance fee you pay when it ends.
3. Find the gap and spread it. Whatever is left of the longer fix's total is the budget for interest over the remaining years. The break-even rate is the rate that uses up exactly that budget.

On an interest-only mortgage the balance stays the same, so step three is simple division. On a repayment mortgage the balance falls each month, so the calculation is worked through month by month until the two totals match.

A worked example

These are illustrative inputs, chosen to show how the sum works:

• Loan amount: £250,000, interest-only
• Five-year fix at 5.95% with a £999 arrangement fee
• Two-year fix at 6.25% with a £999 arrangement fee
• Refinance fee when the two-year fix ends: £999

The five-year fix costs £74,375 in interest plus the £999 fee: £75,374 in total.

The two-year fix costs £31,250 in interest plus the £999 fee: £32,249 for the first two years. That is £1,500 more interest than the five-year fix charges over the same two years. Add the £999 refinance fee and the shorter route starts £2,499 behind.

That leaves £42,126 to cover three years of interest on £250,000 once the refinance fee is paid. The rate that does that is 5.62%.

So in this example, the two-year route only matches the five-year fix if you can refinance at 5.62% or below in two years' time. That is 0.33 percentage points under the five-year rate you could lock in today, and 0.63 points under the two-year rate itself.

On a repayment basis over a 25-year term, the same deals give a break-even rate of 5.59%, with £241,151 still owed when the two-year fix ends.

When the two rates are almost level

Sometimes the two-year rate is the same as, or a little below, the five-year rate. Then there is no rate fall to work out, but the fees still matter. Using the same £250,000 interest-only loan with a two-year fix at 5.93% and a five-year fix at 5.95%, all three fees at £999, the two-year fix charges £100 less interest over its two years. Once the £999 refinance fee is added, though, it still starts £899 behind. A small gap in headline rates can be outweighed by one extra set of fees.

What moves the break-even rate

• The gap between the two rates. The wider it is, the further rates need to fall for the shorter fix to catch up.
• Fees. Every arrangement or refinance fee on the shorter route pushes the break-even rate lower.
• Loan size. Fixed fees matter less on a bigger loan, because they are spread over more interest.
• Interest-only or repayment. A repayment balance shrinks, which changes the interest in later years.

Changing one input at a time shows which of these has the biggest effect on your own result.

Current average rates (checked 5 November 2026)

• Bank of England Bank Rate: 4%, raised from 3.75% on 5 November 2026 by an 8 to 1 vote of the Monetary Policy Committee. The next decision is due on 17 December 2026.
• Average two-year fixed rate: 5.97% at the start of November 2026, up from 5.93% at the start of October (Moneyfacts).
• Average five-year fixed rate: 6.00% at the start of November 2026, up from 5.95% at the start of October (Moneyfacts).
• Moneyfacts Average New Mortgage Rate: 5.89% at the start of November 2026.

Averages are a useful starting point. Your own break-even rate depends on the actual deals and fees in front of you.

Run your own numbers in Stresst

The Rate Break-Even Analyser, part of Stresst Premium, lets you enter the longer fix and the shorter fix, each with its rate and arrangement fee, plus the refinance fee, then switch between Interest-only and Repayment to see your break-even rate and a chart of total cost across future rates. The free Remortgage Calculator compares your current mortgage with up to three new deals, including their fees and any early repayment charge.

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Sources

• Bank of England, Interest rates and Bank Rate: our latest decision, https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate, checked 5 November 2026
• Bank of England, Monetary Policy Summary and minutes, November 2026, https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/november-2026, checked 5 November 2026
• Moneyfacts Group, Mortgage rates hit three-year high, BBR rise imminent (published 4 November 2026), https://www.moneyfactsgroup.co.uk/media-centre/consumer/mortgage-rates-hit-three-year-high-bbr-rise-imminent/, checked 5 November 2026