Analysis published last week by the Bank of England suggested that borrowers at higher loan-to-values (LTVs) are more likely to opt for a two-year fixed rate than a longer-term fixed deal.
The author of the report, professor Lu Liu, argued that this was down to the price difference between rates of different lengths, with borrowers at higher LTVs more likely to be drawn to whatever product offers the lowest repayment today.
While some brokers said they had seen greater numbers of borrowers opting for short fixed rate periods of late, there were warnings that this decision could prove more risky in the years ahead should house prices drop as expected.
The shift to short-term fixes
This is a trend being seen by Kyle-Ann Gatecliffe, director of Kag Financial, who said that clients are opting for shorter-term deals in the hope that house prices will increase, boosting their equity stake ahead of remortgaging a couple of years down the line.
Craig Fish, founder of Lodestone Mortgages & Protection, said that most clients were shifting towards shorter-term deals, not just those with small deposits, on account of the expectation that rates will drop further.
“Clients want flexibility and not to be tied into an overpriced product,” he added.
Fish emphasised that those with smaller deposits need to be conscious of the risk of negative equity, so longer-term fixed rates may be a better option.
Are short-term fixes still ‘sensible’?
In the past, borrowers with small deposits were “sensible” to opt for shorter-term fixed rates, according to Michael Webb, managing director of Mortgage Republic as the rapidly rising house prices meant they could remortgage quickly onto a lower rate when their two-year fixed rate finished.
However, he suggested that this conversation is “more complex” now, with other considerations to focus on, such as the risk of negative equity in the short term.
Lewis Shaw, owner of Riverside Mortgages, said that many first-time buyers with a 5% deposit believe a two-year fix is a good idea, based on the past 10 years where it was “nailed on” that their house would have risen in value.
However, he suggested that it has been “pretty apparent” over the last couple of years that issues were on the way. “As such, unless there was a compelling reason, we advised the vast majority of buyers with a 5% deposit to opt for a five-year fixed rate. Things have changed and now is the time for two-year deals once again.”
The driving factor
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said that his experience had been the opposite to that reported by the Bank of England, with greater numbers of high LTV borrowers opting for five-year fixed rates.
He continued: “This is, however, less through their own choice and more the fact that lenders are only offering the very highest LTV deals on five-year products in the main.”
Taylor-Barr added that of the few two-year deals he had done with smaller deposits, the driver has tended to be an outside factor, such as the client planning to upsize a couple of years down the line.
Considering your options
Gatecliffe noted that the product range at the high end of LTV has decreased compared with six months ago, but suggested this has not reached the point where it has become a concern.
She added: “There are still plenty of options for these clients.”
This was supported by Webb, who argued there was still “an abundance of lending solutions” at high LTVs, though warned that independent advice is critical for these borrowers given the “unpredictable property market moving forward”.
