The majority of borrowers fix their mortgages for two years: Are they right?

According to analysis by Santander, the majority of mortgage borrowers prefer two-year fixed rate deals.

The bank said 60 per cent of customers are now opting for two-year fixed loans in the hope that interest rates will be lower when they come back for a mortgage in two years.

Less than a quarter of its customers choose five-year fixed-rate products, even though they are currently cheaper. The rest mostly choose fixes or trackers that last three or ten years.

This represents a big shift, given that Santander has said in recent years that its customers tend to show a 60/40 split in favor of five-year fixes.

Santander’s lowest two-year adjustment is currently 4.12 per cent, while its lowest five-year adjustment is 3.95 per cent. Both come with a price of £999.

For a £200,000 mortgage repaid over 25 years, this is the difference between paying £1,050 and £1,069 a month.

Must debtors make adjustments for two years?

The majority of borrowers are clearly hedging their bets on mortgage rates falling over the next two years.

But they may face a shock when it comes to refinancing.

It is true that the Bank of England has begun to reduce base interest rates; This is a trend that generally leads to a decrease in mortgage loan interest rates.

However, future rate cuts by the Bank of England have already been factored into fixed-rate mortgage pricing.

That’s why the lowest-priced five-year fixed-rate products are running just above 3.75 per cent, rather than closer to the Bank of England’s 5 per cent base rate.

Mortgage pricing is largely based on Sonia swap rates, which is the interbank lending rate based on future interest rate expectations.

When Sonia swaps increase enough, they cause fixed mortgage rates to rise, and when they fall, the opposite happens.

As of October 24, five-year swaps were at 3.7 percent and two-year swaps were at 3.9 percent; This was close to the price of the best mortgage deals.

This week Santander said it expects interest rates to fall to 3.75 per cent by the end of next year and remain between 3 per cent and 4 per cent for the foreseeable future.

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

The era of constantly changing mortgage loan interest rates is over

Graham Sellar, head of intermediary channels at Santander UK, says: ‘Although the base rate does not determine mortgage rates, it can influence the swap rates lenders pay to financial institutions to obtain fixed funds for a specified period.

‘This means those looking to buy or remortgage a property may find rates remain relatively stable compared to fluctuations in recent years.’

Ravesh Patel, director and senior mortgage advisor at Reside Mortgages, also thinks it is possible for many people to be overly optimistic that interest rates will fall in the near future.

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

‘The Bank of England may eventually cut interest rates as inflation stabilizes, but the pace and extent of these cuts are not guaranteed.

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

‘Lenders may keep interest rates high due to economic risks or liquidity concerns. The upcoming Budget is also likely to impact market sentiment.’

Patel suggests that more borrowers should consider five-year fixes, especially those looking for longer-term stability.

‘The five-year fix protects borrowers from rising interest rates over a longer period, ensuring stability in payments for the foreseeable future,’ he says.

‘The downside is that if rates fall significantly, you’ll be locked into a higher rate for a longer period, unless you can pay the repayment costs of the remortgage sooner.

‘I can say that the five-year option is attractive for those who prioritize stability and want certainty in their payments, especially in an inflation environment.

‘If you’re risk-averse, a five-year fix provides 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 fix.

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

This may mean considering the stability of their employment and whether there will be any changes in their lives over the next few years.

‘Think about your own financial situation,’ he adds. ‘Do you need near-term flexibility or is long-term stability more important?’