What the past decade has taught us about mortgage trends

For the majority of borrowers within the past decade, two-year fixes have been the mortgage product of choice but this is starting to change. Acc

For the majority of borrowers within the past decade, two-year fixes have been the mortgage product of choice but this is starting to change.

According to Mark Harris, chief executive of SPF Private Clients, two-year fixes “were always the most popular product as far as borrowers were concerned”.

This is because the product gave them a measure of security for a reasonable amount of time, but not over-committing them to a high rate should the base rate fall and mortgage providers start to lower their rates. 

However, the two-year fix has started to lose its shine in favour of a slightly longer-term relationship: the five-year fix – and seven and 10-year fixes – are also starting to come into their own.

John Eastgate, sales and marketing director for OneSavings Bank, says there are a range of reasons as to why this should be the case. He comments: “The market has recently witnessed an increase in take-up of longer-term fixed rates, driven in almost equal measure by an ultra-low rate environment, regulatory changes, and customer expectations of future rate rises.”

Why the shift?

According to a spokesman for Yorkshire Building Society, one of the main reasons for the shift from two- and three-year fixes towards five, seven and even 10-year terms is uncertainty.

The spokesman explains: “There tends to be a trend towards borrowers seeking longer-term fixes when there is a level of uncertainty in the market, for instance, after the EU referendum.

“We have also seen a clear shift in consumers moving towards longer-term fixed mortgages in the run-up to the base rate announcement in November 2017, with five-year business becoming more popular.”

“Given the prevailing low interest rate environment”, says Andrew Montlake, director for London-based broker Coreco, “We have seen a move towards medium- to longer-term fixed rates, such as five-year fixes, which have grown in popularity.”

The five-year fix

The five-year fix does what it says on the tin: fixes a mortgage rate at a stated percentage for five years or at least until enough time has passed for the borrower to be able to negotiate a remortgage without having to pay an early repayment charge (ERC).

Generally, a longer-term fix came with slightly higher fees on it. “The [two-year] also tended to be quite a bit cheaper than five-year fixes”, says Mr Harris, “but as pricing on the latter has fallen, and there is no longer much difference [in pricing] between the two, many borrowers have shifted towards the five-year fix.”

A decade ago, few people would have felt comfortable locking into a five-year fix at 5.5 per cent (as of December 2007) given the discrepancy in pricing.

Mr Montlake states: “Previously there was a very strong two-year market as the difference between the two and the five-year market was quite pronounced. Now, however, when you can get five-year fixes below 2 per cent, the decision around fixing for longer is more defined.”

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