What the past decade has taught us about mortgage trends

According to Mark Harris, chief executive of SPF Private Clients, two-year fixes "were always the most popular product as far as borrowers were concerned".

This is because the product gave them a measure of security for a reasonable amount of time, but not over-committing them to a high rate should the base rate fall and mortgage providers start to lower their rates. 

However, the two-year fix has started to lose its shine in favour of a slightly longer-term relationship: the five-year fix - and seven and 10-year fixes - are also starting to come into their own.

John Eastgate, sales and marketing director for OneSavings Bank, says there are a range of reasons as to why this should be the case. He comments: "The market has recently witnessed an increase in take-up of longer-term fixed rates, driven in almost equal measure by an ultra-low rate environment, regulatory changes, and customer expectations of future rate rises."

Why the shift?

According to a spokesman for Yorkshire Building Society, one of the main reasons for the shift from two- and three-year fixes towards five, seven and even 10-year terms is uncertainty.

The spokesman explains: "There tends to be a trend towards borrowers seeking longer-term fixes when there is a level of uncertainty in the market, for instance, after the EU referendum.

It is not surprising that homeowners are racing to fix the cost of their mortgage for longer terms. John Heron 

"We have also seen a clear shift in consumers moving towards longer-term fixed mortgages in the run-up to the base rate announcement in November 2017, with five-year business becoming more popular."

"Given the prevailing low interest rate environment", says Andrew Montlake, director for London-based broker Coreco, "We have seen a move towards medium- to longer-term fixed rates, such as five-year fixes, which have grown in popularity."

The five-year fix

The five-year fix does what it says on the tin: fixes a mortgage rate at a stated percentage for five years or at least until enough time has passed for the borrower to be able to negotiate a remortgage without having to pay an early repayment charge (ERC).

Generally, a longer-term fix came with slightly higher fees on it. "The [two-year] also tended to be quite a bit cheaper than five-year fixes", says Mr Harris, "but as pricing on the latter has fallen, and there is no longer much difference [in pricing] between the two, many borrowers have shifted towards the five-year fix."

A decade ago, few people would have felt comfortable locking into a five-year fix at 5.5 per cent (as of December 2007) given the discrepancy in pricing.

Mr Montlake states: "Previously there was a very strong two-year market as the difference between the two and the five-year market was quite pronounced. Now, however, when you can get five-year fixes below 2 per cent, the decision around fixing for longer is more defined."

Moreover, had people fixed for the long-term back in 2007 or 2008, they would have watched the continued downward trajectory of mortgage rates.

This would have been particularly galling as, within just two years, the base rate fell to a long-term record low of 0.5 per cent - a state unchanged until August 2016, when it dipped to 0.25 per cent until returning to 0.5 per cent in November 2017.

But in a low interest rate environment, the temptation to lock in a mortgage rate of 1.99 per cent or 2.19 per cent for five years can seem very tempting, especially as mood music from the Bank of England and economists suggest we could see a return to interest rates of 1.25 per cent by the end of 2018.

This could climb even higher as the UK negotiates its departure from the European Union, which might spark higher inflation due to further weakening of sterling - although as the below graph from the Bank of England shows, we may be many economic crises away from the double-digit highs of the 1970s to early 1990s. 

Bank of England interest rate 1975-2017

With a rise in the bank base rate invariably comes a rise in the rates offered on mortgages - first one high-street bank lender starts to hike rates by a quarter of a percentage point, then 50 basis points - and one by one the competition follows suit.

Such is the mental reckoning among mortgage borrowers, who are now seeking to lock in a low rate and protect themselves for at least five years. John Heron, managing director at Paragon Mortgages, comments: “With interest rates gradually increasing, after a long period of historic lows, it is not surprising that homeowners are racing to fix the cost of their mortgage for longer terms.

"Over the coming months, it is likely that we will see a further surge of borrowers locking into fixed rates before they climb higher."

How high can they go?

Jeremy Duncombe, currently director of the Legal & General Mortgage Club, opines: "We are seeing a trend towards longer-term fixes, with five-year fixed-rate mortgages becoming increasingly popular.

"With the recent base rate rise, and Brexit uncertainty, we are seeing more borrowers now opting to fix their rates for the longer-term to protect against future rate increases, but also to stop them coming off a two-year rate in the immediate aftermath of any potential Brexit deal."

Inevitably the next question is whether there will be a trend towards seven or even 10-year fixes. 

According to data from Moneyfacts, there have been more long-term products coming to the mortgage market in recent years, offering some rather interesting rates and loan-to-values (LTV). 

According to the data, there are:

• 90 different 10-year mortgage offers currently on the market.
• 32 of these are from Nationwide; 31 are from TSB.
• These two players (Nationwide and TSB) dominate the 10-year fixed-rate mortgage market.
• Initial rates vary from 2.34 per cent to 5.09 per cent.
• TSB offers the highest LTV for first-time buyers at 95 per cent LTV, for 5.09 per cent (both direct and through intermediaries).
• The majority of LTVs below a 3 per cent initial rate is 60 per cent LTV, whether for a first-time buyer or second-time buyer.
• The most expensive in terms of arrangement charges is a Barclays Mortgage sold both direct and through intermediaries. It has a 70 per cent LTV (for first-time or remortgaging), at 2.59 per cent initial rate and a £2,499 arrangement fee.

Explaining the rationale behind the rising proportion of longer-term fixed rates, Rachel Springall, finance expert at Moneyfacts, says: "A decade-long fixed mortgage can be ideal for borrowers looking to secure their monthly repayments over the longer-term.

"Those who believe their circumstances may change over the next 10 years may feel more comfortable with a five-year fixed mortgage, and there are considerably more fixed-rate deals for borrowers comparing two or five-year fixed mortgages than 10-year ones, and the rates are lower."

Ms Springall adds that with the expectation for rates to rise in coming years, "now may be the time for borrowers to think seriously about fixing for longer to avoid any increases to their monthly payments".

According to Mr Eastgate: "The rates on offer today are perhaps as low as we will ever see them go, and we have seen more people therefore willing to take a fixed rate over the longer term."

Popularity versus cost

The plethora of mortgage options, and a greater amount of choice as to the length of fixes has helped to boost applications for longer-term mortgage deals, but whether the seven or 10-year fix will become as popular as the five-year fix has become is still a matter of debate.

Mr Duncombe is sceptical about a sharp rise in 10-year fixes. "Longer, 10-year fixed-rate mortgages have not been as popular. 

"The rate gap between two and 10-year fixed-rate mortgages is much higher, and these products lack flexibility, with significant early repayment charges for those borrowers ending their terms early."

Looking at data from the Consolidated Analysis Centres Inc (Caci), while there have been many 10-year fixed products coming onto the market, these do not seem to have "taken any material share of it", according to a spokesperson from Halifax.

Given the preponderance of 60 per cent LTV on offer among the 10-year fixes, together with rates of up to 5 per cent or more and some expensive arrangement fees, according to Moneyfacts, this could be a factor putting off some potential borrowers.

Mr Harris agrees, arguing that while there is more choice now for longer-dated mortgage products, demand is not rising enough: "Lenders have tried here and there to introduce longer fixes of 10 years, but borrowers still seem reluctant to fix for such a long period of time.

"If longer-term fixes could be developed without the onerous ERCs, then they would become more popular."

But for Jaedon Green, director of product and distribution for Leeds Building Society, practicality in light of the current environment may outweigh any cost considerations about paying slightly higher rates for five, seven or 10-year fixes compared with two or three-year fixes.

"There has always been demand from borrowers who like to plan and have certainty of payments over a set period", he says, "And it is no surprise that, during this historically low interest rate period, the majority of new mortgages are now fixed rate."

simoney.kyriakou@ft.com