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| Homebuyers turn to five-year fixed rate mortgages | Homebuyers turn to five-year fixed rate mortgages |
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| Would you fix your mortgage for five years, seven or even 10? A few years ago the vast majority of people would have said no, opting instead for a cheaper, shorter-term two-year deal. But the tide has turned and increasing numbers of borrowers want the certainty of a longer-term commitment, say brokers – and lenders are offering more, and better, deals. | Would you fix your mortgage for five years, seven or even 10? A few years ago the vast majority of people would have said no, opting instead for a cheaper, shorter-term two-year deal. But the tide has turned and increasing numbers of borrowers want the certainty of a longer-term commitment, say brokers – and lenders are offering more, and better, deals. |
| Tomorrow HSBC is launching the lowest ever five-year fixed rate at 2.49% for those with a 40% deposit or the equivalent equity (be warned; the fee is a whopping £2,000). | Tomorrow HSBC is launching the lowest ever five-year fixed rate at 2.49% for those with a 40% deposit or the equivalent equity (be warned; the fee is a whopping £2,000). |
| This is the first time a five-year fix has dropped below 2.5% – but it's not just HSBC getting in on the act. In the last year, the number of five-year fixed-rate deals has increased by 73%, says data provider Moneyfacts. By comparison, the traditionally popular two-year fixes have only increased by 33%. | This is the first time a five-year fix has dropped below 2.5% – but it's not just HSBC getting in on the act. In the last year, the number of five-year fixed-rate deals has increased by 73%, says data provider Moneyfacts. By comparison, the traditionally popular two-year fixes have only increased by 33%. |
| Sylvia Waycot, editor at moneyfacts.co.uk said: "Five-year fixed-rate mortgages have traditionally been a bit too expensive to be the first choice for most of us. However, thanks to lenders enjoying cheap loans from the government this is changing." | Sylvia Waycot, editor at moneyfacts.co.uk said: "Five-year fixed-rate mortgages have traditionally been a bit too expensive to be the first choice for most of us. However, thanks to lenders enjoying cheap loans from the government this is changing." |
| The government announced last week that it is extending its Funding for Lending scheme, which has been widely credited with bringing mortgage rates down for borrowers. | The government announced last week that it is extending its Funding for Lending scheme, which has been widely credited with bringing mortgage rates down for borrowers. |
| Experts believe rates on all mortgage terms could become more competitive in the year ahead. So, with all these cheap deals around, should you look to fix at all and if so, for how long? | Experts believe rates on all mortgage terms could become more competitive in the year ahead. So, with all these cheap deals around, should you look to fix at all and if so, for how long? |
| Consider the base rate | Consider the base rate |
| Borrowers deciding whether to fix will undoubtedly want to take into account the widespread speculation that interest rates are unlikely to rise any time soon. "Our view is that we won't see a rise in the 0.5% base rate until 2016," says Rob Harbron, economist from the Centre for Economics and Business Research (CEBR). "Expectations for continued low rates are a result of our outlook for the economy – weak growth conditions are expected to remain the 'new normal' for the next few years." | Borrowers deciding whether to fix will undoubtedly want to take into account the widespread speculation that interest rates are unlikely to rise any time soon. "Our view is that we won't see a rise in the 0.5% base rate until 2016," says Rob Harbron, economist from the Centre for Economics and Business Research (CEBR). "Expectations for continued low rates are a result of our outlook for the economy – weak growth conditions are expected to remain the 'new normal' for the next few years." |
| Economist Ian Kernohan from Royal London Asset Management adds that as the UK is still in post-crisis recovery mode, this means disappointing growth and low interest rates for at least a few years. "We have pencilled in the first rate rise for late 2015 at the very earliest," he says. | Economist Ian Kernohan from Royal London Asset Management adds that as the UK is still in post-crisis recovery mode, this means disappointing growth and low interest rates for at least a few years. "We have pencilled in the first rate rise for late 2015 at the very earliest," he says. |
| Martin Ellis, housing economist at the Halifax, adds that as interest rates look set to remain at the same level for the rest of the year, this offers a compelling reason for some borrowers to stay on tracker rates. | Martin Ellis, housing economist at the Halifax, adds that as interest rates look set to remain at the same level for the rest of the year, this offers a compelling reason for some borrowers to stay on tracker rates. |
| "However, a fix provides absolute certainty about the cost of monthly repayments," he says. | "However, a fix provides absolute certainty about the cost of monthly repayments," he says. |
| Robin Barter, 44, and his wife, Tracey, 46, are among those who have just remortgaged on to a five-year fix for the first time. The couple live in a four-bedroom house in Oxfordshire with their three children: Scott, nine, Luke, seven, and Hugh, four. | Robin Barter, 44, and his wife, Tracey, 46, are among those who have just remortgaged on to a five-year fix for the first time. The couple live in a four-bedroom house in Oxfordshire with their three children: Scott, nine, Luke, seven, and Hugh, four. |
| Prior to remortgaging, the Barters had held tracker mortgages with Halifax for 14 years but have now switched to NatWest. "Initially, I thought we'd go for another tracker, as I'm familiar with this kind of deal," says Robin, an account director. "But when we contacted broker London & Country, they came back with the same conclusion that I was starting to reach, that in the current economic climate we'd be better on a fix. | Prior to remortgaging, the Barters had held tracker mortgages with Halifax for 14 years but have now switched to NatWest. "Initially, I thought we'd go for another tracker, as I'm familiar with this kind of deal," says Robin, an account director. "But when we contacted broker London & Country, they came back with the same conclusion that I was starting to reach, that in the current economic climate we'd be better on a fix. |
| "Given that the base rate is only going to go up at some point, we decided to go for a five-year fix with NatWest." | "Given that the base rate is only going to go up at some point, we decided to go for a five-year fix with NatWest." |
| This was priced at 2.99% and came with a £995 fee; the deal also offered both free valuation and legal work. "Locking into a low five-year fix now gives us peace of mind that our payments are protected for longer," says Robin. | This was priced at 2.99% and came with a £995 fee; the deal also offered both free valuation and legal work. "Locking into a low five-year fix now gives us peace of mind that our payments are protected for longer," says Robin. |
| "It also means we won't have to pay fees to remortgage again in a few years, as we would with a shorter deal." | "It also means we won't have to pay fees to remortgage again in a few years, as we would with a shorter deal." |
| Beware sky-high fees | Beware sky-high fees |
| For some borrowers, choosing a rock-bottom mortgage rate may be a false economy, according to Andrew Montlake from broker Coreco. | For some borrowers, choosing a rock-bottom mortgage rate may be a false economy, according to Andrew Montlake from broker Coreco. |
| "Having to remortgage and pay high arrangement fees every two years may not be the best way to go," he says. | "Having to remortgage and pay high arrangement fees every two years may not be the best way to go," he says. |
| "For example, while borrowers may like the sound of HSBC's two-year fix at 1.89%, at up to 60% loan-to-value (LTV), the fee of £1,999 adds roughly 0.5% to the rate spread over the two years. As a result, Norwich & Peterborough's fix with a slightly higher rate of 1.99% at up to 60% LTV and a fee of £995 could be a better option over two years." The key is to factor in the product fee as well as the headline rate. "This will determine whether you are better off paying a higher fee and taking the very lowest rate, or opting for a slightly higher rate with a lower arrangement fee," says Montlake. | "For example, while borrowers may like the sound of HSBC's two-year fix at 1.89%, at up to 60% loan-to-value (LTV), the fee of £1,999 adds roughly 0.5% to the rate spread over the two years. As a result, Norwich & Peterborough's fix with a slightly higher rate of 1.99% at up to 60% LTV and a fee of £995 could be a better option over two years." The key is to factor in the product fee as well as the headline rate. "This will determine whether you are better off paying a higher fee and taking the very lowest rate, or opting for a slightly higher rate with a lower arrangement fee," says Montlake. |
| Is two years long enough? | Is two years long enough? |
| With little expectation of the base rate climbing in the near term, brokers say borrowers are increasingly turning to deals that protect their payments for longer than two years. | With little expectation of the base rate climbing in the near term, brokers say borrowers are increasingly turning to deals that protect their payments for longer than two years. |
| After the new HSBC five-year fix, the lowest on rate alone is Yorkshire building society at 2.59% at 60% LTV. Again, this comes with a £1,475 fee. Norwich & Peterborough building society has a five-year fix at 2.74% at 60% LTV with a much lower fee of £295. | After the new HSBC five-year fix, the lowest on rate alone is Yorkshire building society at 2.59% at 60% LTV. Again, this comes with a £1,475 fee. Norwich & Peterborough building society has a five-year fix at 2.74% at 60% LTV with a much lower fee of £295. |
| With the base rate unlikely to rise in the near future, it could be argued that borrowers should consider fixing for even longer than five years. Adrian Anderson, from broker Anderson Harris, says: "There are some amazingly cheap 10-year fixes beginning to appear, such as Yorkshire's at 3.99%, up to 75% LTV, with no fee." | With the base rate unlikely to rise in the near future, it could be argued that borrowers should consider fixing for even longer than five years. Adrian Anderson, from broker Anderson Harris, says: "There are some amazingly cheap 10-year fixes beginning to appear, such as Yorkshire's at 3.99%, up to 75% LTV, with no fee." |
| Elsewhere, Chelsea building society is offering a seven-year fix at 3.59%, at 75% LTV, with a low £375 fee. | Elsewhere, Chelsea building society is offering a seven-year fix at 3.59%, at 75% LTV, with a low £375 fee. |
| Despite this, the market for seven and 10-year fixes is less popular. | Despite this, the market for seven and 10-year fixes is less popular. |
| "Fixing for this period is a long time to commit to," says Anderson. "Most borrowers are unhappy to do so – plus most also lock the borrower in with hefty early repayment charges." | "Fixing for this period is a long time to commit to," says Anderson. "Most borrowers are unhappy to do so – plus most also lock the borrower in with hefty early repayment charges." |
| Montlake agrees that longer-term fixes are only suitable for borrowers who don't need flexibility. | Montlake agrees that longer-term fixes are only suitable for borrowers who don't need flexibility. |
| "While most products are portable if you move house, there is no guarantee the lender will lend the same amount should your income or circumstances change in the meantime," he says. "This is why most buyers prefer to fix for five years." | "While most products are portable if you move house, there is no guarantee the lender will lend the same amount should your income or circumstances change in the meantime," he says. "This is why most buyers prefer to fix for five years." |
| Should you fix your savings too? | Should you fix your savings too? |
| Savings rates across the board are at a record low, leaving many people wondering whether it makes sense to lock their money away in a fixed-rate account. | Savings rates across the board are at a record low, leaving many people wondering whether it makes sense to lock their money away in a fixed-rate account. |
| Savings rates have been falling since the Funding for Lending scheme was launched last August because lenders no longer need to rely on savings deposits to fund borrowing; there are fears this trend may not stop. | Savings rates have been falling since the Funding for Lending scheme was launched last August because lenders no longer need to rely on savings deposits to fund borrowing; there are fears this trend may not stop. |
| However, in the current climate, says Andrew Hagger from MoneyComms, savers need to think carefully before tying up their money for the long term. | However, in the current climate, says Andrew Hagger from MoneyComms, savers need to think carefully before tying up their money for the long term. |
| "The extra reward for locking in for three or four years is virtually nothing," he says. | "The extra reward for locking in for three or four years is virtually nothing," he says. |
| The top rate on a five-year fix is 2.9% from First Save, according to Hagger, while the top rate on a three-year fix is 2.5% from Shawbrook Bank, and the top one-year is Aldermore paying 2.25%. | The top rate on a five-year fix is 2.9% from First Save, according to Hagger, while the top rate on a three-year fix is 2.5% from Shawbrook Bank, and the top one-year is Aldermore paying 2.25%. |
| Equally, while fixed-rate Isas are paying slightly more competitive rates, these are still low. Halifax has a five-year fix at 3.1% and a three-year fix at 3%. Aldermore has a one-year fix at 2.25%. | Equally, while fixed-rate Isas are paying slightly more competitive rates, these are still low. Halifax has a five-year fix at 3.1% and a three-year fix at 3%. Aldermore has a one-year fix at 2.25%. |
| That said, for those worried that variable savings rates are going to fall further still, locking money away may seem the right decision. | That said, for those worried that variable savings rates are going to fall further still, locking money away may seem the right decision. |
| "Five years ago, the best five-year fixed-rate bonds were paying around 6.5%, so it just goes to show how much can change," says Anna Bowes from SavingsChampion.co.uk. | "Five years ago, the best five-year fixed-rate bonds were paying around 6.5%, so it just goes to show how much can change," says Anna Bowes from SavingsChampion.co.uk. |
| Top mortgages | Top mortgages |
| Chelsea Building Society | Chelsea Building Society |
| Yorkshire BS | |
| Nationwide | Nationwide |
| Provided by London & Country for the Guardian | Provided by London & Country for the Guardian |