The number of five-year fixes has increased 73% in the past year as two-year deals lose popularity with mortgage borrowers
Would you fix your mortgage for five years, seven or even 10? A few years ago the vast majority of people would have said no, opting instead for a cheaper, shorter-term two-year deal. But the tide has turned and increasing numbers of borrowers want the certainty of a longer-term commitment, say brokers – and lenders are offering more, and better, deals.
Tomorrow HSBC is launching the lowest ever five-year fixed rate at 2.49% for those with a 40% deposit or the equivalent equity (be warned; the fee is a whopping £2,000).
This is the first time a five-year fix has dropped below 2.5% – but it’s not just HSBC getting in on the act. In the last year, the number of five-year fixed-rate deals has increased by 73%, says data provider Moneyfacts. By comparison, the traditionally popular two-year fixes have only increased by 33%.
Sylvia Waycot, editor at moneyfacts.co.uk said: “Five-year fixed-rate mortgages have traditionally been a bit too expensive to be the first choice for most of us. However, thanks to lenders enjoying cheap loans from the government this is changing.”
The government announced last week that it is extending its Funding for Lending scheme, which has been widely credited with bringing mortgage rates down for borrowers.
Experts believe rates on all mortgage terms could become more competitive in the year ahead. So, with all these cheap deals around, should you look to fix at all and if so, for how long?
Consider the base rate
Borrowers deciding whether to fix will undoubtedly want to take into account the widespread speculation that interest rates are unlikely to rise any time soon. “Our view is that we won’t see a rise in the 0.5% base rate until 2016,” says Rob Harbron, economist from the Centre for Economics and Business Research (CEBR). “Expectations for continued low rates are a result of our outlook for the economy – weak growth conditions are expected to remain the ‘new normal’ for the next few years.”
Economist Ian Kernohan from Royal London Asset Management adds that as the UK is still in post-crisis recovery mode, this means disappointing growth and low interest rates for at least a few years. “We have pencilled in the first rate rise for late 2015 at the very earliest,” he says.
Martin Ellis, housing economist at the Halifax, adds that as interest rates look set to remain at the same level for the rest of the year, this offers a compelling reason for some borrowers to stay on tracker rates.
“However, a fix provides absolute certainty about the cost of monthly repayments,” he says.
Robin Barter, 44, and his wife, Tracey, 46, are among those who have just remortgaged on to a five-year fix for the first time. The couple live in a four-bedroom house in Oxfordshire with their three children: Scott, nine, Luke, seven, and Hugh, four.
Prior to remortgaging, the Barters had held tracker mortgages with Halifax for 14 years but have now switched to NatWest. “Initially, I thought we’d go for another tracker, as I’m familiar with this kind of deal,” says Robin, an account director. “But when we contacted broker London & Country, they came back with the same conclusion that I was starting to reach, that in the current economic climate we’d be better on a fix.
“Given that the base rate is only going to go up at some point, we decided to go for a five-year fix with NatWest.”
This was priced at 2.99% and came with a £995 fee; the deal also offered both free valuation and legal work. “Locking into a low five-year fix now gives us peace of mind that our payments are protected for longer,” says Robin.
“It also means we won’t have to pay fees to remortgage again in a few years, as we would with a shorter deal.”
Beware sky-high fees
For some borrowers, choosing a rock-bottom mortgage rate may be a false economy, according to Andrew Montlake from broker Coreco.
“Having to remortgage and pay high arrangement fees every two years may not be the best way to go,” he says.
“For example, while borrowers may like the sound of HSBC’s two-year fix at 1.89%, at up to 60% loan-to-value (LTV), the fee of £1,999 adds roughly 0.5% to the rate spread over the two years. As a result, Norwich & Peterborough’s fix with a slightly higher rate of 1.99% at up to 60% LTV and a fee of £995 could be a better option over two years.” The key is to factor in the product fee as well as the headline rate. “This will determine whether you are better off paying a higher fee and taking the very lowest rate, or opting for a slightly higher rate with a lower arrangement fee,” says Montlake.
Is two years long enough?
With little expectation of the base rate climbing in the near term, brokers say borrowers are increasingly turning to deals that protect their payments for longer than two years.
After the new HSBC five-year fix, the lowest on rate alone is Yorkshire building society at 2.59% at 60% LTV. Again, this comes with a £1,475 fee. Norwich & Peterborough building society has a five-year fix at 2.74% at 60% LTV with a much lower fee of
