The Daily Telegraph - Saturday - Money
Brexit turns buyers to longer loans
Mortgage borrowers seeking to protect themselves against economic uncertainty are well-placed to take out longer deals, as banks have slashed fixed rates on these loans in a bid to attract new custom.
The housing market is drying up thanks to pre-Brexit jitters, forcing mortgage lenders to cut rates to lure in the remaining borrowers in the market. Rate wars between banks have traditionally centred on the two-year fixed-rate market, but with short-term deals already at historic lows, lenders are now competing to cut the cost of borrowing for five years.
Customers willing to lock in until 2024 can access home loans with interest rates of less than 2pc, as well as protecting themselves from future turbulence in the economy.
Research published by Moneyfacts, the data provider, showed that the battle between banks has intensified this year and the gap between the average two-year and five-year fixed-rate mortgage has narrowed to its lowest level in six years.
The average two-year fixed rate on the market is 2.5pc compared with 2.91pc for a five-year equivalent. This 0.41 percentage point gap is the lowest recorded since 2013.
As recently as 2016 this gap was 0.64 percentage points, meaning five-year deals have become significantly more attractive to borrowers in recent years.
Major banks including Barclays, HSBC, Nationwide and NatWest have cut rates since the start of 2019, in addition to many smaller lenders.
Dilpreet Bhagrath of Trussle, an online mortgage broker, said that given the political uncertainty surrounding Brexit, customers were considering longer terms.
“Many borrowers find that a two-year deal doesn’t offer enough stability to see them through turbulent times,” she said. “With only a limited number of lenders offering three-year loans, this can make a five-year deal more desirable.”
Miss Bhagrath said those locking in for longer also avoided paying multiple mortgage arrangement fees.
Avoid extra fees
The savings from fixing for longer are potentially enormous. Analysis by mortgage broker Anderson Harris for Telegraph Money showed that a homeowner could save £5,000 by locking into a five-year loan.
The cheapest five-year fixed rate is currently available to brokers from Halifax at 1.79pc, subject to a £1,499 arrangement fee. By comparison, the cheapest two-year deal also comes from Halifax, with an interest rate of 1.4pc plus a £1,499 arrangement fee.
The two-year deal will be cheaper in the short term thanks to the lower initial rate, but when a full five-year period is considered, the longer fix may be the best value for money. That is because homeowners taking a two-year deal will have to take out another loan in 24 months’ time. If interest rates were to increase by 1 percentage point by that stage, the borrower would then spend the next two years paying a rate of 2.4pc. When that loan expires the customer would need to take out a third two-year fix. Assuming a rate of 2.4pc and a £1,499 fee for each new deal, a borrower with a £200,000 loan would spend £24,497 over five years.
By comparison, the five-year fix, despite the higher interest rate, has a lower overall cost of £19,399, £5,098 cheaper.
However, there are risks for those locking in for the long term. If interest rates were to fall, perhaps if the Bank of England were to cut the Bank Rate in the aftermath of Brexit, then borrowers could be left paying more than they need to. Jonathan Harris, of Anderson Harris, said that most customers in the past five years would have been better off taking out repeated two-year fixes and paying extra fees, given the continued low interest rates.
A sluggish housing market means that borrowers are able to lock in for less, says Adam Williams Major banks Barclays, HSBC, Nationwide and NatWest have cut rates this year
However, with Bank Rate already at 0.75pc, it can be argued that there is little wiggle room to reduce rates significantly after Brexit, and this has made five-year deals more appealing.
Mr Harris said: “With five-year fixed rates available at less than 2pc, there are some excellent deals available. Lenders have seen transaction levels fall on the back of Brexit uncertainty.
“Would-be buyers and sellers are waiting to see what happens but lenders need them to keep taking out mortgages.”
He added: “A five-year fixed rate gives you the best of both worlds – protection from Brexit uncertainty and potential rate rises, while at the same time locking into a cheap rate.”
Miss Bhagrath said the slowdown in the housing and mortgage markets was likely to continue until the political uncertainty surrounding Brexit was over.
“In the last year, we’ve seen a decline in the number of people purchasing compared to those remortgaging,” she said. “With the current uncertainty caused by Brexit, many sellers will be reluctant to put their homes on the market, while many buyers are adopting a wait and see approach.”