The UK’s 5% interest rate is forcing remortgagers to consider the sort of questions poker players face — whether to take what’s on the table or to play a longer game.
Around 800,000 fixed-rate deals are due to end in the second half of this year, according to banking trade body UK Finance, with around 1.6 million deals due to end in 2024.
Many of the homebuying market’s core two- and five-year deals were signed at sub-2% mortgage rates, but both of these terms now top 6%.
The Bank of England’s Monetary Policy Committee, in the minutes of its June meeting, reports that money markets are betting that the base rate will average 5.5% over the next three years.
Talk of borrowers opting to fix for longer at a time when rates have climbed looks improbable in the near term
This comes as the central bank bids to bring down the country’s 8.7% inflation rate, which is more than four times its 2% target.
Latest data from UK Finance shows that the proportion of homeowners opting for a two-year fix in April rose by 4% from the figure in March, reaching 30% as they bet that rates would fall within 24 months.
The same data shows that borrowers on five-year fixes fell by 4% to 49% over the same period. Homeowners on variable rates also fell by 1% to 13%, while those on mortgages over five years were unchanged at 2% in April.
The stretch that so many will be feeling is likely to see fixed rates continue to be the deal of choice for most
Brokers point out there are very few long-term home loans on offer, with Kensington Mortgages’ options — with terms from 11 to 40 years and no ERC payable if the borrower sells or repays the mortgage — seen as being some of the most sophisticated products in the market, and most other lenders’ long-term deals stretching only as far as 10 years.
L&C Mortgages associate director of communications David Hollingworth says: “We are yet to see serious growth in the long-term market. Talk of borrowers opting to fix for longer at a time when rates have climbed looks improbable in the near term, as many are actually fixing for a shorter two-year period in the hope that rates will have come back down over the next couple of years.”
Your Mortgage Decisions director Dominik Lipnicki adds: “Clients are very worried about the rising rates but at the same time they are keen not to be tied in if and when rates fall.”
Rising costs in other areas mean people are having to take careful consideration of where their budget sits when making property-related decisions
Private Finance technical director Chris Sykes points out that a typical 30-year flexi fixed-rate mortgage “sits in the late 5%s or early 6%s”, which is not markedly different from current two- and five-year fixes.
Connect for Intermediaries director of mortgages Jane Benjamin says the market’s reliance on relatively short-term deals leaves remortgagers facing hikes that will add hundreds of pounds a month to new home loans.
She says: “The past few months have clearly demonstrated that the current two- and five-year fixed-rate product pricing model for lenders is in need of an overhaul.
“Short-notice rate pulls by lenders are not helpful for customers or brokers and the Financial Conduct Authority’s focus on preventing customer foreseeable harm brings the current funding models into question.”
Clients are keen not to be tied in if and when rates fall
The high-rate environment means borrowers are asking their brokers very specific questions, adds Sykes.
He says: “The one I am getting a lot at the moment is along the lines of, ‘How much can I borrow with payments of, say, £2,000 per month?’ rather than, ‘Here is my income. What is the maximum a lender will give me?’”
He adds that “rising costs in other areas mean people are having to take careful consideration of where their budget sits when making property-related decisions”.
However, while many remortgagers are gambling on two-year fixes, others are searching for alternatives. JLM Mortgage Services group director Sebastian Murphy says clients are looking at stretching a home loan term, or opting for a part-and-part mortgage — a middle ground between repayment mortgages and interest-only mortgages — for a period of two to five years.
The past few months have clearly demonstrated that the current two- and five-year fixed-rate product pricing model is in need of an overhaul
For homeowners currently on a low rate, a second charge mortgage has become more attractive, adds Benjamin.
Hollingworth points out: “The benefits of trackers and variable deals are likely to feature more although the stretch that so many will be feeling is likely to see fixed rates continue to be the deal of choice for most.”
Remortgagers must consider a range of costly options before making their next move.
