Remortgage customers lead the move away from longer terms
Homeowners are increasingly opting for two-year fixed-rate mortgages over five-year deals as rates edge down from recent peaks, according to search activity data from price comparison website Moneyfactscompare.co.uk.
The proportion of users comparing two-year fixed-rate mortgages climbed from 48.4% in February to 55.9% in June. Over the same period, interest in five-year fixed products dropped from 27.7% to 22.9%.
The move towards shorter-term deals is most marked among those remortgaging, where the share opting for two-year fixes rose from 59.5% to 66.5%. Among home movers, the figure increased from 40.9% to 52.1%.
Pricing is helping to drive the trend. Borrowers with larger amounts of equity are typically finding that two-year fixed rates now undercut comparable five-year products. Those with smaller deposits, however, are more often seeing five-year fixes priced more competitively, leaving them to balance the appeal of a lower rate against the benefit of shorter-term flexibility.
“Borrowers are still reluctant to lock themselves into longer-term deals and instead are favouring the flexibility of a two-year fix as expectations for lower mortgage rates continue to build,” said Adam French (pictured right), head of consumer finance at Moneyfacts. “However, it isn’t an approach without risk. As recent years have shown time and again, our volatile times can have a rapid effect on borrowing costs.
“The shift is also being supported by pricing. Borrowers with more equity will typically find that two-year fixed rates are now slightly cheaper than comparable five-year deals, making shorter fixes attractive for those looking to refinance again if rates continue to improve.
“However, first-time buyers and borrowers with smaller deposits are facing a different market. At higher loan-to-value ratios, five-year fixed mortgages often continue to offer lower rates than comparable two-year deals, meaning these borrowers must weigh the lower initial cost against the flexibility of a shorter fixed term. That may help explain why first-time buyers appear to be diversifying their choices rather than overwhelmingly switching to two-year fixes.”
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