We need to call time on two-year fix rate mortgages

Insanity is doing the same thing over and over and expecting different results.

That apocryphal quote may not actually be from Albert Einstein, but Britain needs to get rid of the madness of the two-year fixed rate mortgage.

Again, our love of fixing the interest on a lifetime debt for a period that flashes by all too quickly greatly exacerbates the problems in the mortgage market.

Two-year fixed interest rates are not responsible for the current mortgage chaos – thanks to years of economic blunders by the Bank of England and government – ​​but they certainly add to the misery.

I certainly don’t blame anyone for taking out one as two-year fixes are heavily pushed by the mortgage industry, but I do think lenders and regulators need to take a hard look at why they’re still allowing this without a serious financial health warning.

It should be mentioned that if you need to get a home loan now, it’s possible that a two year fix isn’t a bad idea, but generally these are a problem in our mortgage market and not a solution.

An inflation-driven panic has sent key interest rate expectations, government bond yields, money market swap rates and ultimately mortgage rates skyrocketing.

The average two-year fixed mortgage rate for all deposit levels has skyrocketed to 6.19 percent and is still rising.

This means unhappy borrowers whose two-year, fixed-rate mortgages are up for renewal will face huge increases in their monthly payments.

In June 2021, the average two-year fixed interest rate for a borrower with a 25 percent down payment was 2.17 percent, according to Moneyfacts. The average interest rate on the same mortgage is now 5.94 percent.

For someone with a £200,000 mortgage over 25 years, this is a £417 difference between paying £864 a month and paying £1,281.

For those coming off five-year fixes, it’s not that painful — as rates for that were slightly higher in 2018 and are slightly lower now.

Nevertheless, they still face a big jump in costs. Using the same mortgage example as above, but compared to now five years ago, our actual mortgage calculator shows that monthly payments are £324 higher.

In many countries, even a five-year fix would be considered short term.

In the US and France, for example, it is quite normal to fix your rate for 25 years.

Michael Gove had a point when he indicated why a shift in mindset to longer-term, fixed-rate mortgages would be a good idea for the UK this week.

Sure, you wouldn’t want to be stuck with it now, with interest rates at frantic station levels, but overall it might be just as sensible to abandon short-term fixes as the shift from widespread floating rates in the 1990s.

Yet we have heard this clarion call many times before and repeatedly ignored it. The general reaction of the mortgage industry, whenever long-term solutions are proposed, is that people don’t really want them and they never get off the ground.

On the face of it, this is true, but sometimes people need a big push toward things that are better for them.

I don’t think two-year mortgages should be banned, but I do think they should include a financial health warning.

Think back to the credit crunch and one of the problems in the US mortgage market was something called teaser rates.

These were widely criticized for offering low initial rates before returning to much higher ones, remember anything you know?

I remember back then, as a young, This is Money mortgage reporter, I thought they looked suspiciously like our own beloved fix of two years.

Ultimately, the Bank of England, the government, banks, building societies and mortgage brokers know that a two-year fixed rate is a fundamentally risky product.

Yet they are still flogged with gleeful abandon at ignorant homeowners without adequate warning of what could go wrong if interest rates suddenly skyrocket or the mortgage market freezes.

If you fully understand the risk and are happy to take one, then a two year fix is ​​fine – but for most people it’s not much.

The two-year fixed rate mortgage is based on the fact that borrowers are always able to re-mortgage at a reasonable rate, but as the credit crunch has shown, sometimes they can’t.

This was a major problem in late 2007 and 2008, and Britain avoided a mortgage crisis as the Bank of England cut key interest rates from 5.75 percent to 0.5 percent.

We’re in a different kind of credit crunch now, with lenders getting rid of mortgages and driving prices up, while the Bank of England is moving in the opposite direction – all the way from 0.1% to maybe 5% today and then on to a peak of 6% .

There are an estimated 1.4 million people who will need to re-mortgage this year and many will experience a major jump in payments.

Research by the excellent Neal Hudson, who tweets as @resi_analystshows that due to much larger mortgage sizes and much larger loan-to-income ratios, the increase to 6 percent in mortgage rates is equivalent to the increase in the early 1990s to 13 percent.

Figures from the IFS show how this is affecting a generation of homeowners in their 30s and 40s.

The Bank of England owes them and others an apology, as it spent years reassuring borrowers that when interest rates rose, they would be ‘limited and gradual’ – when instead they were brutal and fast.

The mortgage market was a bloodbath last month. It feels like we may be in peak panic mode and hopefully things will settle down and rates will come down a bit.

Ironically, now may not be the time to ditch the two-year fix and lock in at higher rates for years to come.

But for the longer term, we need to get the UK mortgage market out of the bi-annual casino and put it on a healthier footing.