Borrowers are increasingly preferring 5 year fixed mortgages

Five-year mortgage fixes becoming the norm

Borrowers are increasingly spurning two-year fixed rate mortgage deals in favour of five-year deals when getting a home loan or remortgaging, according to lenders and brokers.

Amid an opaque outlook for Britain’s post-Brexit economy and rising Bank of England base rates, the historic dominance of the two-year fix is being challenged as borrowers set greater store on the certainty of longer-term options in spite of their higher expense.

David Hollingworth, director at mortgage broker L&C Mortgages, said the number of clients taking up five-year fixed-rate deals had overtaken those opting for two-year fixes in recent months.

“It’s the first time we can point to that as a sustained trend in take-up,” he said. “The rates for five-year deals are still a bit higher but not by such a margin that borrowers can’t see beyond that, to the longer term certainty these deals bring.”

Graham Sellar, head of mortgage business development at Santander, said the high street bank had seen a significant rise in appetite for longer-term deals over the classic two-year fix. “Five-year fixes were probably more popular in August this year than they have been for the last decade or so.”

But he added this situation could very quickly change, depending on the movement of market swap rates that guides lenders’ pricing of their loans. “It could be a moment in time, but it could be a trend.”

Adrian Anderson, director at mortgage broker Anderson Harris, said 70 per cent of the broker’s clients were now plumping for five-year deals, up from about 40 per cent five years ago. “If borrowers are certain they’re not going to be moving or selling within five years, they’re virtually all taking five-year fixes,” he said.

Appetite for these mortgages had been growing well before last month’s rise in Bank of England base rates, but the quarter point rise to 0.75 per cent had added to the sense that more rises were on the way — and that locking in a lower rate was therefore a sensible move.

“When you have a rise in base rates it does make people think a little bit more. There’s uncertainty about rates but also levels of income and jobs. They want to tuck the mortgage away on a five-year fix and not think about it,” Mr Anderson said.

Mr Sellar said the take-up was partly a reaction to base rate rises among younger mortgage borrowers, a generation who were accustomed to rates sitting at an ultra low 0.25 per cent. “There’s a whole generation of customers who have seen two base rate rises in nine months and are thinking ‘my goodness’ . . . Previously they hadn’t seen any rises for 10 years, so a two-year fix was fine.”

Part of the attraction of longer term deals is that the difference between interest rates charged on five- and two-year has narrowed in the past two years: in June, research group Moneyfacts found that average rates on five-year fixes was 2.92 per cent, against 2.52 for two-year deals.

One major UK high street bank told the FT that the share of its five-year fixes taken up by customers had risen from 20 per cent at the beginning of the year to around half today.

Another lender, Yorkshire Building Society, said it had seen a surge in customers seeking longer-term fixed rate mortgages since the base rate rise. It said this week that there had been a 13 per cent rise in the numbers applying for a five-year fixed rate deal since August 2, when rates rose to 0.75 per cent.

Another advantage of the five-year deal is that it reduces the frequency of the booking fees usually charged by lenders, compared with those flipping between fixed deals every two or three years. But advisers said borrowers should carefully consider the charges made by lenders if they wanted to repay the mortgage ahead of schedule.

Borrowers may be keen to bring some certainty to their mortgage payments, but few are interested in paying for the reassurance of a 10-year deal, brokers said. “The 10-year fix remains a niche market,” said Mr Hollingworth. “With certainty you are also limiting flexibility for yourself.”

Date published: 07 September 2018

James Pickford


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