Time to Discuss Five Year Fixed Rate

Home owners look to shield themselves from future base rate rises

“Long-term fixed-rate mortgages (five years or more) are not covered by the mortgage affordability rules, meaning that lenders do not need to stress-test these borrowers.”

MORTGAGES WITH long-term fixed rates (five years or more) now account for half of new mortgage lending, according to analysis from the Bank of England (BOE). Although two-year fixed rate mortgage deals still offer a cheaper rate than five-year fixed rate deals, the latest data from the Moneyfacts UK Mortgage Trends Treasury Report show that the gap between the average two and five-year fixed rates is at its lowest point since June 2013.

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TWO FACTORS TO CONSIDER

But why are more borrowers opting for long-term fixed rate mortgage products? There are two factors to consider: the new mortgage rules and a shift in interest rates. In 2014, the Financial Policy Committee (FPC) introduced new rules, including a requirement for mortgage lenders to stresstest mortgage affordability. The rules act as an ‘insurance policy’ to protect against imprudent lending and a further rise in the number of highly indebted households. The affordability test requires mortgage lenders to ensure that new mortgage borrowers could afford their mortgage if interest rates went up by 3% within the first five years of the loan.

MORTGAGE AFFORDABILITY RULES

Long-term fixed rate mortgages (five years or more) are not covered by the mortgage affordability rules, meaning that lenders do not need to stress-test these borrowers. The FPC noted that this could make long-term fixed rates more attractive to borrowers. Also, there could be an incentive for lenders to offer borrowers these products in order to circumvent the mortgage affordability rules. However, the analysis shows that lenders typically stress-test all borrowers, meaning long-term fixed rate mortgages tend not to be treated differently.

REDUCTION AT THE LENDER’S DISCRETION

However, it’s more likely that lower interest rates have had more impact on the popularity of long-term fixed rate mortgages than the mortgage affordability rules. If you have a fixed rate mortgage, then your mortgage payments will not have changed because of the last interest rate cut nor any future reductions. If you are on a standard variable rate (SVR) then you may have seen a reduction at the lender’s discretion.

MORE EXPENSIVE WAY TO BORROW

One the biggest attractions of fixing your mortgage rate is the certainty it provides to your monthly payments and overall finances. The interest rate is fixed for a specific period and will remain at this rate irrespective of any changes that the Bank of England (BOE) may make. At the end of the fixed period, the interest rate will typically revert to the lender’s SVR, which traditionally has been a more expensive way to borrow.

UNPREDICTABLE ENVIRONMENT

Most lenders will offer mortgages fixed for an initial term of two, three or five years. Some lenders also offer initial fixed periods of ten years. Currently, banks are constantly reacting to the unpredictable environment and the interest rates between two-year and five-year fixed rate mortgages are at their closest levels in recent years. It is important that you consider the early repayment charges (ERCs) that typically apply to such mortgages and take into consideration your future plans.

REVIEW YOUR CURRENT MORTGAGE

Take time to review your current mortgage and ensure that it continues to be the right mortgage for your personal circumstances. The 95% mortgage guarantee announced in Budget 2021 came with a condition that lenders offer borrowers the opportunity to fix their rates for at least five years, which the Treasury said would offer ‘valuable extra certainty’.

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>> WANT TO SHIELD YOUR MORTGAGE AGAINST FUTURE BASE RATE RISES? <<

Longer fixed rate mortgages may now look even more appealing to some home owners who want to shield themselves from future base rate rises, but that’s not to say they will suit everyone. To discuss your options, contact - UK +44 (0) 203 883 1017 Hong Kong +852 6017 4140 – email info@cedar-crest.co.uk.

Your home may be repossessed if you do not keep up repayments on your mortgage.