The difference in rate between fixed terms is narrowing
An increasing number of lenders are offering mortgage products for five-year fixes and two-year fixes at similar rates.
Ross Williams (pictured left), head of mortgage product and pricing at Hodge, said that growing similarities in five-year and two-year fixed deals arise when short term volatilities in the market make it more difficult to ascertain what funding costs for lending are likely to be, with the longer-term view offering greater stability.
“There is more certainty in the longer-term view, hence why five-year pricing is at the moment, and with certain lenders, more aligned with two-year pricing,” he said.
Overcoming affordability challenges
Williams said that lenders might also be looking to make longer term fixed deals more flexible as a way of helping their customers overcome affordability challenges in the current climate, and better supporting them in getting where they want to be too.
“I do not have a crystal ball, but it seems likely these swaps will fall in the remainder of 2023, however, helping the market settle further,” Williams said.
In the meantime, he believes the role brokers have to play has arguably never been more important when it comes to supporting customers with budget planning and reviewing the pros and cons of a two-year versus five-year deal with this in mind.
Rates a far cry from the past
David Hollingworth (pictured right), associate director of London and Country, said although interest rates are a far cry from the super low rates that borrowers had become used to in recent years, we still have a highly competitive market.
He added that lenders will likely have to scrap harder to attract customers due to the lower level of activity and the dip in confidence brought about by higher rates and the higher cost-of-living.
However, inflation figures, Hollingworth said, have started to have an impact on fixed rates.
With the expectation of a further rise to the base rate, the uncertainty surrounding the market has led to many lenders temporarily pulling products.
This has resulted in many of the remaining products rising in rate levels, with Moneyfacts stating that the average rate on a two- and five-year fixed residential mortgage has risen to 5.38% and 5.05% respectively since the start of May 2023. Meanwhile, the average rate on a two- and five-year fixed buy-to-let mortgage has increased to 5.61% and 5.52% respectively over the same period.
Normally, Hollingworth said, a shorter term fix would typically be lower than a longer term, but he believes this shift continues to reflect the market’s expectation that interest rates will edge back over time.
“It has certainly been apparent that the popularity of two-year deals has increased when five-year deals have typically dominated in recent years,” he said.
That is an indicator that, although customers like the idea of some certainty in their payments, Hollingworth said, they are also wary of locking in for a longer term even if it means they are sat on a higher rate, if the base rate continues to climb.
“There is clearly no guarantee that will actually happen but customers seem to be prepared to take that chance in the hope of being able to benefit from lower rates in a couple of years’ time, even if it might cost them a touch more in the near term,” Hollingworth said.
Why do you believe the difference between two- and five-year fixed mortgage product rates are narrowing? Let us know in the comment section below.
