If you’re considering a fixed rate for your next mortgage, you’re not alone. The latest research from Experian has found that borrowers are overwhelmingly searching for fixed-rate deals as homeowners look for stability in uncertain times.
So how popular are fixed-rate mortgages? And why are so many borrowers choosing them?
Four out of five borrowers looking for fixed-rate deals
The latest Experian Credit Barometer has revealed that 81% of searches in May were directed at fixed rates, compared with 72% in March and 77% in April. It means that more than four in five mortgage shoppers are considering a fixed rate option.
Conversely, searches for variable products fell in May, with just one in ten searching for a tracker rate and just 9% looking for a variable mortgage.
Amir Goshtai, Managing Director of Experian Marketplace & Affinity, says: “People want certainty when it comes to their finances, especially in times of such economic uncertainty.
“Rising popularity in fixed-term mortgages and high searches for loans for debt consolidation tell us borrowers are looking for low, fixed monthly payments to effectively manage their outgoings and keep control of their finances.
“Interest rates for mortgages and loans are relatively low so now is a good time for borrowers to shop around and seriously consider locking-in their monthly repayments,” he adds.
Borrowers protecting themselves against future interest rate rises
With interest rate rises on the horizon, it’s perhaps no surprise that borrowers are looking for the security and stability that a fixed rate provides.
2018 saw the Bank of England raise the base rate for the first time in a decade, while Governor Mark Carney has also said that he expects interest rates to rise twice more over the next three years.
One of the main benefits of a fixed-rate deal is that it guarantees your mortgage payments at a fixed level for a specified term. You know that whatever happens to the base rate during that period, you’ll always pay the same amount.
For homeowners looking for a fixed-rate mortgage, there’s also been good news in terms of the choice of deals available. Earlier this year, Moneyfacts reported that the number of fixed-rate deals available to homeowners had reached its highest rate in 12 years.
In February this year, there were 5,214 fixed-rate mortgage products on the market in the UK; the highest number since the global financial crisis. It represents a rise of 644 over the same time in 2018.
Should you choose a five-year fixed-rate mortgage?
So, it’s clear that fixed-rate mortgages are currently the choice for the majority of borrowers in the UK. Once you’ve decided to fix, your next question is: how long do I fix for?
Historically, short-term fixed rates (typically two or three years) have been the most popular with borrowers. Combining low rates with the flexibility to change your arrangements at the end of the fixed period have seen many homeowners choose this type of deal.
However, as five-year fixed-rate products get cheaper, more and more consumers are turning to a longer-term fix.
According to Moneyfacts, the gap in cost between two and five-year deals has narrowed to just 0.36%, the smallest margin since January 2012. The average two-year fixed-rate deal fell to 2.49% in June 2019, while the average five-year fixed-rate deal dropped to 2.85%.
Darren Cook from Moneyfacts says: “It seems that the intense competition within the two-year fixed rate sector is also appearing in the five-year fixed-rate market.
“Currently, mortgage rates appear to be competitive across the board, allowing borrowers the flexibility to choose whether to fix repayments for either the short, medium or longer-term initial rate periods.
“However, borrowers must also remember to consider other factors, such as potentially greater fee expenses if they opt for a shorter initial fixed payment term and have to switch deals more frequently or the possible implication of mortgage tie-in costs if they wish to shop elsewhere during a longer initial rate period.”
With a £150,000 repayment mortgage over 25 years, the cost of the average five-year fixed rate would be £700, compared to £672 for the average two-year deal. While it’s still more expensive to choose the five-year rate, you won’t have the additional fees of remortgaging at the end of the two-year deal.
Things to remember if you’re considering a five-year fixed rate
Remember that longer-term fixed-rate deals typically come with Early Repayment Charges during the fixed period. If you wanted to move home or repay your mortgage you could end up paying thousands of pounds of charges if you committed to a five-year deal.
Read more about this in our blog: The pros and cons of long-term fixed-rate mortgages
While most five-year fixed rates are portable, meaning that you can take the rate with you when you move to a new house, your lender will want to underwrite your application when you come to move home.
If your circumstances have changed – for example, your salary has fallen, or your credit report is not as good – you could find that your lender won’t agree the borrowing you need. You may then have to seek a new lender and pay significant Early Repayment Charges.
If you’re looking for advice on the right mortgage deal for you, get in touch. We can help you find the right lender and the most appropriate product for you. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.