The majority of borrowers fix their mortgage for two years: are they right?

According to an analysis by Santander, the majority of mortgage providers opt for two-year fixed-rate agreements.

The bank said that 60 percent of customers currently opt for a two-year term, hoping that interest rates will be lower when they want to take out a new mortgage in two years.

Less than a quarter of customers choose products with a five-year fixed rate, even though they are currently cheaper. The rest usually opt for three- or ten-year fixes, or trackers.

This marks a big shift, as Santander says its customers have tended to show a 60/40 split in favor of five-year solutions in recent years.

Santander’s lowest two-year fix is ​​currently 4.12 percent, while the lowest five-year fix is ​​3.95 percent. Both come with a £999 cost.

For a mortgage of €200,000 that is repaid over 25 years, this is the difference between €1,050 per month and €1,069.

Do borrowers have to fix for two years?

The majority of borrowers are clearly hedging their bets against a decline in mortgage rates over the next two years.

But they could be in for a shock if they need to refinance.

It is true that the Bank of England has started cutting its base rate – a trend that is leading to lower mortgage rates overall.

However, future interest rate cuts by the Bank of England have already been factored into the fixed interest rates for mortgages.

This is why the lowest priced five-year fixed income products hover just above 3.75 percent, rather than closer to the Bank of England’s base rate of 5 percent.

Mortgage pricing is largely based on the Sonia swap rate – an interbank rate based on future interest rate expectations.

When the Sonia swaps rise enough, this often results in a rise in the fixed mortgage rate, and vice versa when it falls.

On October 24, five-year swaps were at 3.7 percent and two-year swaps at 3.9 percent – ​​close to the price of the best mortgage deals.

This week, Santander announced that it expects interest rates to fall to 3.75 percent by the end of next year and then remain between 3 and 4 percent for the foreseeable future.

If Santander’s prediction proves correct, mortgage rates are unlikely to change much from where they are now.

The time of ever-changing mortgage rates is over

Graham Sellar, head of intermediary channels at Santander UK, said: ‘While the base rate does not determine mortgage rates, it can influence the swap rate, which is what lenders pay to financial institutions to obtain fixed funding for a set period.

‘This means that those looking to buy a property or take out a new mortgage are likely to see rates relatively static compared to the volatility of recent years.’

Ravesh Patel, director and senior mortgage adviser at Reside Mortgages, also thinks it is possible that many people are being too optimistic about falling interest rates in the near future.

‘The UK has had a very low interest rate environment for a long time, so it is natural that many people think that interest rates will return to such levels. But times have changed,” he says.

‘While the Bank of England may eventually cut interest rates as inflation stabilizes, the pace and size of those cuts are not guaranteed.

‘Moreover, mortgage interest rates do not always move in line with the base interest rate.

“Lenders could keep rates higher due to concerns about economic risks or liquidity. The upcoming budget is also likely to impact sentiments in the market.”

Patel suggests more borrowers should consider a five-year solution, especially those looking for more long-term stability.

“A five-year fix protects borrowers from rising interest rates over a longer period of time, ensuring payment stability for the foreseeable future,” he says.

‘The downside is that if interest rates fall significantly, you will be stuck with a higher rate for a longer period unless you can afford the early repayment costs to refinance sooner.

“I would say that for those who prioritize stability and want certainty about their payments, especially in an inflationary environment, the five-year option is attractive.

“If you are risk averse, a five-year solution will provide you with peace of mind.”

Patel was also keen to point out that there isn’t necessarily a right or wrong answer when it comes to choosing between a two-year or five-year solution.

He says ultimately it will come down to one’s risk tolerance and personal circumstances.

This could mean thinking about the stability of their work and whether there will be changes in their lives in the coming years.

“Think about your own financial situation,” he adds. ‘Do you need flexibility in the short term, or is stability more important in the long term?’