Banks are reacting to the unpredictable environment, meaning once circumstances are less risky the rates on these products might change and the gap between the two could widen again.
So this week, Mortgage Solutions is asking: Do you think it’s the best time to lock into a longer rate? Or might borrowers risk missing out on better deals later down the line?
The first thing to look at when assessing whether a two- or five-year product is most suitable, is to understand the client’s objectives.
As that overrides what you may, or may not, think the market may do.
Assuming that is done, we then look at the available market data. While it may seem counterintuitive, two-year deals should offer the best value in the long term.
If you look at two-year swaps and the London Interbank Offered Rate (LIBOR) they are both below the current Bank of England base rate, which indicate rates are more likely to go down than up in the short term – three months to two years to be specific.
Meanwhile over a five-year period, financial markets are only predicting a small chance of a rise.
If you are in the high loan to value (LTV) brackets, keeping the deal short term and reducing the debt as much as possible over that period may well get you a better deal when you come to refinance.
Two huge risk warnings though – firstly, that assumes house prices will go up over two years which may not happen and secondly, financial markets don’t always get it right.
It is a good indication on pricing over the next three, six and 12 months, but beyond that, there are simply too many variables right now to say with any certainty what the future may look like.
However, all logic would point to interest rates staying very low, for a very long time, so why fix in for the long term to hedge against something that isn’t likely to happen?
Our advice on what type of mortgage a client should take really all depends on the client’s personal circumstances.
A lot can happen to your life in five years and we have recently seen some of our new clients pay off some hefty early repayment charges due to being fixed for five years, so it is not always the best option for people even if the difference between two and five years is small.
The product is generally the last thing we will advise on when advising the best mortgage option for our clients.
Having flexibility with your finances is very valuable though and five-year fixed rates do the absolute opposite of this.
We’re seeing lots of customers who want to lock in some certainty and low mortgage rates.
With furlough ending next month and being replaced with a new scheme, the government’s Covid guidance changing by the day, and Brexit still looming large – I think that it makes a lot of sense.
Provided you are not one of the 11 per cent now reportedly considering a house move, I do think this would be an excellent time to remortgage or get a new mortgage for longer.
This is especially true if you have less equity, or a smaller deposit.
We’ve just seen the Bank of England row back from suggestions of any fall to a negative base rate, at least in the near future.
And even if that did happen in time, I don’t believe it would translate to lower mortgage rates for consumers.
Products are, for now, still priced at historical lows, at least in the lowest risk category of 60 per cent LTV for salaried customers.
We do see lenders continuing to go cold on higher LTV mortgages, by either withdrawing products or by pricing up in a big way.
Lenders are worried about credit risk, the future of unemployment and house prices, and indeed their own profitability.
So, I don’t see mortgages above 75 per cent LTV getting cheaper or easier to get in the next few months – if a customer can remortgage now for a longer term, it is worth springing to action.