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Halifax two and five-year fixed rate pricing makes advice more important than ever

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  • 13/04/2022
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Halifax two and five-year fixed rate pricing makes advice more important than ever
Halifax’s decision to make a selection of its five-year fixed rates cheaper than two-year fixed rates has piqued broker interest and shows an expectation that borrowers will increasingly opt for longer-term fixed rates.

 

The change is linked to the cost of funds as short-term swaps are more expensive than their long-term equivalents. This is partially due to the expectation the Bank of England will increase the base rate again this year.

The lender now offers a two-year fixed rate at 60 per cent loan to value (LTV) with a £999 fee at 2.54 per cent, where its five-year fixed rate at the same LTV tier and fee is 2.48 per cent.

The price difference applies to certain products up to 80 per cent LTV, with a differential of between 0.01 and 0.12 per cent, depending on LTV tier and fee structure.

Market trends suggest that this may become more widespread as the margin between two and five-year fixed rates has shrunk over the past year.

According to Moneyfacts figures, the average two-year fixed rate in April last year was 2.58 per cent and the average five-year fixed rate was 2.77 per cent. It now stands at 2.86 per cent and 3.01 per cent respectively.

The margin between the two rates last year was 1.23 per cent. This has now contracted to 0.15 per cent.

Rachel Springall, finance expert at Moneyfacts, said: “Just because a lender is offering a lower rate over the longer-term than say on its two-year fixed within its range doesn’t necessarily mean it’s the best deal for a borrower.

“It’s vital that consumers speak with a broker to compare deals carefully for the overall true cost package and be wary on choosing a mortgage based on its initial fixed rate alone. Fixed rates are on the rise, so it’s important borrowers are conscious of this if they plan to wait a little longer to change their deal.”

 

Funding costs, increasing volume and protecting service levels

David Hollingworth, associate director of communication at L&C Mortgages, said that there could be a number of reasons why a lender would price products that “appears to defy convention”.

“It could be that funding costs have a bearing and that could help lenders to price longer term deals at similar rates to shorter term products,” he said.

“For example, if markets expect rates to ease back after a shorter-term spike that could result in lower costs on longer term funds that would typically be anticipated.”

He added that it could be because a lender wants to drive higher volume in a certain area to balance its book if shorter term rates have been more dominant.

“Alternatively, if there’s been a spike in volume and a lender wants to protect service levels then it could step away slightly on certain products to give a more even inflow and ensure processing doesn’t suffer.”

 

Borrowers need to be aware of higher costs and ERCs with long-term fixed rates

Adrian Anderson, director of property finance specialist Anderson Harris, said: “It was almost unheard of for five and 10-year mortgage fixed rates to be cheaper than two-year fixed rates which is the opposite of what we are used to.”

He added: “It feels like mortgage fixed rate pricing is turning on its head. It’s likely that banks will continue to pull existing and introduce more expensive rates hence anybody seeking to remortgage should take action soon,” he concluded.

During this anxious time when the cost of goods and services are increasing, and outgoings are being squeezed, medium to longer term mortgage fixed rates can help with budgeting and provide peace of mind. he said.

“It is important for borrowers to seek independent mortgage advice and consider how long they may want to keep the mortgage in place for to avoid potential costly early repayment penalties. When applying for a mortgage there are more factors to take into consideration than just applying for the cheapest rate,” Anderson said.

Nicholas Mendes, mortgage technical manager at John Charcol, said that Brexit, the pandemic and growing pressure on households has changed the outlook of lenders on quoting higher rates for longer fixed rates.

He said Halifax’s decision to offer a five-year fixed rate at a lower rate and Nationwide aligning the rates of its home mover three and five-year fixed rate at 2.04 per cent, showed “lenders’ determination to sway a client to fix longer”.

He added: “Other aspects have also played their part. The lender can typically stress more favourably on a longer-term fixed rate, given the changes in affordability calculations to reflect increased household pressures, such as rising energy, tax, and council tax bills, typically clients could expect to be able to borrow more on a five-year fixed than anything shorter.”

When advising, Mendes said he would outline the benefits of a longer-term fixed rate, balanced against the higher costs and portability. He added that he would ask borrowers how often they may want to review their mortgage depending on circumstance as a shorter term period may be more beneficial.

He added: “This is a nice conversation starter, but in the grand scheme of things, despite being cheaper than their two-year fixed rate the five-year fixed rate isn’t the most cost effective product on the market.”

 

 

 

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