@soworriedaboutthis If the bank thinks that the average interest rate over the first two years will be the same as the average interest rate over the longer period then they will nevertheless charge more for the longer loan to account for the risk that they might be wrong and rates might rise.
This is called a
risk premium and it's a fundamental of fixed-interest finance. The fact that you're being offered a cheaper rate for the longer term loan means that the bank(s) think that rates will fall over the period - the fixed-interest loans market in the City thinks that interest rates will fall, and you'll be able to remortgage cheaper in 2 years time.
However, the point of the fix is that it buys certainty - you know exactly what the rate is going to be for 5 years, and you don't have to worry if you get it wrong.
Your mate who's a mortgage underwriter might have more money than you and be able to afford it he's wrong and if rates go up.
Another thing I will say is that the rates we experienced between 2010 and 2020 were ahistorically low - lower than they have been in literally
750 years or more.[sup]
PDF[/sup] Current rates are not extraordinarily high - although the Bank of England intends to try and get them back down again, current rates are more or less normal, and it's not certain that they won't remain high for some time to come.
I think there are people in the City (I think Matt Levine at Bloomberg has written about this) who have forgotten what interest rates are normally like - a sort of "institutional memory loss". If you're in your late 30's or early 40's and you've worked in the City all your professional life then you've spend most of your career dealing with the anomalously low interest rates of the 2010's, and interest rates weren't that high in the late 90's (??) and 00's either. The City isn't that used to interest rate shocks at the moment, as might be inferred by
what happened with gilts and pensions in late September last year.
I get criticised here sometimes for saying you should invest in the stockmarket instead of overpaying your mortgage (this depends on the circumstances) and IFAs and others sometimes tell me that this is too risky. But the risky thing here is to take the shorter fix - the longer fix buys you certainty. And when the longer fix is cheaper, then this is cash in your pocket
now when you need it (which you can invest in your pension if you wish).