Most borrowers are fixing their mortgage for two years: are they right?

Most mortgage borrowers opt for two-year fixed rate agreements, according to analysis by Santander.

The bank said 60 per cent of customers currently choose two-year solutions in the hope that interest rates will be lower when they remortgage in two years’ time.

Less than a quarter of its clients opt for five-year fixed rate products, even though they are currently cheaper. The rest mostly choose solutions that last three or ten years, or trackers.

This represents a big change, given that in recent years, Santander says its clients have tended to show a 60/40 split in favor of five-year solutions.

Santander’s lowest two-year fix is ​​currently 4.12 per cent, while its lowest five-year fix is ​​3.95 per cent. Both come with rates of £999.

On a £200,000 mortgage repaid over 25 years, that’s the difference between paying £1,050 a month and £1,069.

Should borrowers lock in the term for two years?

Most borrowers are clearly hedging their bets on falling mortgage rates over the next two years.

But you may be in for a surprise when it comes time to refinance.

It’s true that the Bank of England has started to reduce the base rate, a trend leading to lower mortgage rates overall.

However, future interest rate cuts by the Bank of England are already built into the prices of fixed rate mortgages.

This is why the lowest priced five-year fixed rate products hover just above 3.75 per cent, rather than closer to the Bank of England’s base rate of 5 per cent.

Mortgage pricing is largely based on Sonia swap rates, an interbank interest rate based on expectations of future interest rates.

When Sonia swaps rise high enough, it often results in fixed mortgage rates rising, and vice versa when they fall.

As of Oct. 24, five-year swaps were at 3.7 percent and two-year swaps at 3.9 percent, close to the price of the best mortgage deals.

This week, Santander revealed that it expects interest rates to fall to 3.75 percent by the end of next year and then remain between 3 percent and 4 percent for the foreseeable future.

If Santander’s forecast turns out to be correct, mortgage rates are unlikely to change much from where they are now.

The days of constantly changing mortgage rates are over.

Graham Sellar, head of intermediary channels at Santander UK, says: “While the base rate does not dictate mortgage rates, it can affect swap rates, which is what lenders pay financial institutions to acquire fixed finance over a period. of a certain time.

Is volatility over? Rates could remain static, says Graham Sellar, director of intermediary channels at Santander UK

“This means that those looking to buy a property or remortgage may well see rates remain relatively static compared to the volatility of recent years.”

Ravesh Patel, director and senior mortgage consultant at Reside Mortgages, also believes many people may be being too optimistic about rates falling in the near future.

‘For a long time, the UK has had a very low interest rate climate, so it is natural that many people would think that rates would return to that level again. But times have changed,” he says.

‘While the Bank of England may eventually lower rates as inflation stabilizes, the pace and extent of those reductions are not guaranteed.

«In addition, mortgage rates do not always vary at the same rate as the base rate.

‘Lenders could keep rates higher due to concerns about economic risks or liquidity. The upcoming budget is also likely to affect market sentiments.

Patel suggests that more borrowers should consider five-year solutions, particularly those seeking greater long-term stability.

Expert: Ravesh Patel, Director and Senior Mortgage Consultant at Reside Mortgages

“A five-year arrangement protects borrowers from rising rates for a longer period, ensuring payment stability for the foreseeable future,” he says.

‘The downside is that if rates fall significantly, you are locked into a higher rate for a longer period, unless you can pay the early repayment charges to remortgage sooner.

‘I would say that for those who prioritize stability and want certainty over their payments, especially in an inflationary environment, the five-year option is attractive.

“If you’re risk-averse, a five-year solution offers peace of mind.”

Patel also wanted to point out that there is not necessarily a right or wrong answer when it comes to choosing between a two-year or five-year solution.

He says that ultimately it will all come down to a person’s r.Risk tolerance and personal circumstances.

This might mean considering the stability of their employment and whether they may have any life changes coming up in the coming years.

“Consider your own financial situation,” he adds. “Do you need short-term flexibility or is long-term stability more important?”