More than 40 per cent of respondents said they had been advising ‘a lot more’ five-year deals than two-year deals due to the borrower’s affordability needs. A further 23 per cent said they had been recommending more five-year deals but only marginally.
Brokers said that while five-year deals offered by some lenders have more lenient stress tests, it should not be the only reason for the recommendation.
Matthew Arena, managing director of Brilliant Solutions, said: “Borrowers on the cusp of meeting a lender’s affordability criteria may need to opt for a five-year fixed rate to get the finance, which could account for the rise in five-year recommendations. But what a borrower needs to do in order to get a mortgage may not always be in their best interests.
“The adviser must take into account all the borrower’s circumstances before recommending the deal, and not fall into the trap of being an order taker. As long as the deal is still appropriate for the borrower, a five-year deal can be useful for its affordability benefits.’
Medium-term stability
Your Mortgage Decision director Dominik Lipnicki said his team of advisers were recommending a lot more five-year fixed rates than two-year deals, but it was not because borrowers may be able to get a lower stress test.
“Homeowners want a five-year fixed rate because they are looking for stability and less risk over the short to medium term,” he said.
Lipnicki said he thinks one of the biggest responsibilities advisers have is to make sure borrowers understand the current low rate environment is not normal.
“You have a generation of buyers who have never known interest rates to be higher than they are now,” he said. “It is our duty to tell them how exceptionally low they are, particularly five-year fixed rates. A significant increase could have a big impact on their budget.’
Spoilt for choice
Five-year fixed deals are currently in abundance. Last month, analysis from Moneyfacts revealed that 1,542 five year fixed rate mortgages were on the market, nearly twice the number available five years ago.
Furthermore, fierce competition for borrowers among the high street banks and a fall in the swap rates for five-year money has seen the cost of deals tumble.
The difference between the cheapest two-year deal from NatWest at 1.21 per cent and the cheapest five-year deal from TSB at 1.54 per cent is now just 0.33 per cent, according to Moneyfacts.
David Hollingworth, director at L&C, said: “The margin between short and medium-term rates has become so narrow that borrowers are increasingly attracted to the greater security of a five-year fixed rate. With an uncertain political and economic outlook that preference for security is only increased.”
Hollingworth added that while taking advantage of lenders’ different approaches to stress testing can be helpful for borrowers using a five-year deal, there is a risk that some may select a product based on what they can borrow rather than focusing on whether it is the right deal for them.
“For advisers it’s important that the affordability element is not the primary focus and that customers are opting for a longer term deal for the right reasons,” he said. “Most fixed deals will tie the borrower in throughout the fixed rate period so the consequences of locking in for too long could be a substantial early repayment charge.”
