MORE borrowers are choosing five-year fixes over two-year fixes in a bid for “certainty” as mortgage rates remain volatile, new research has found.
An increasing number of borrowers are choosing to lock in for longer with their mortgages, Heron Financial’s Client Sentiment Report has found.
Two-year fixes stayed dominant but lost ground every month from April to June, falling from 68.1% in April to 65.1% in May to 58.0% in June, new figures show.
Five-year fixes went the other way, from 10.6% to 13.8% to 18.0%.
So April to June ended with more borrowers buying the certainty of five-year fixes.
The split runs along experience. Across the book, five-year fixes accounted for 14.1% of second quarter product choices. Among first-time buyers, they accounted for 43.6%. The least experienced borrowers in the quarter, carrying the highest loan to values (LTVs), were three times more likely than everyone else to lock in for five years.
The Iran war has led to global oil prices rising from around $70 before the conflict to a peak of $114. In the past week it rose again to over $100 – though it has since dropped to around $85 this week.
This feeds into inflation and drives up swaps, which is what mortgage rates are priced on.
It has led to an environment of volatility with the Halifax and Santander raising rates this week – the direction of the market is up.
The first driver is certainty
Matt Coulson, Founder at Rickmansworth-based Heron Financial, said people are seeking certainty amid a volatile time.
He added: “Two things are pushing borrowers to five-year fixes, and neither is the hope of a lower rate. Two-year fixes have fallen from 68% of choices in April to 58% in June, while five-year deals have risen from around 11% to 18%, and the pattern is sharper among first-time buyers, more than four in ten of whom are fixing for five years.
“The first driver is certainty: when rates are volatile, a payment that holds for five years is worth a lot, especially to those with least room for error. The second, less discussed, is affordability. Some lenders offer enhanced affordability on a five-year deal, so a longer fix can stretch borrowing further, which matters most to those reaching hardest to get in.
“It may be why the least experienced buyers on the highest loan-to-values are three times more likely than anyone else to fix for the longer term. Which suits someone depends on how long they plan to stay, but given the choice in an uncertain market, more are choosing a payment they can count on.”
Tracey Dixon, Buy-to-Let Mortgage Specialist & Owner at Cardiff-based Pure Mortgage and Protection, said no one knows what rates will be in two years’ time.
She added: “We are seeing more borrowers choosing five-year fixed rates, particularly first-time buyers and those who value certainty over trying to predict where interest rates will go next. For some, affordability schemes also mean a five-year fix is part of accessing the borrowing they need.
“However, there isn’t a one-size-fits-all answer. A two-year fix can still be the right option for borrowers expecting their circumstances to change or who are comfortable reviewing their mortgage sooner. The biggest mistake is trying to time the market.
“No one knows exactly where rates will be in two years’ time. The right mortgage isn’t necessarily the cheapest today – it’s the one that fits your financial plans and gives you confidence you can comfortably afford the payments for the whole fixed-rate period.”
Certainty has become a financial asset
Stephen Perkins, Managing Director at Norwich-based Yellow Brick Mortgages, said the length of fix depends on your situation.
He added: “After years of volatility, certainty has become a financial asset in its own right. We’re seeing more borrowers, particularly first-time buyers, choosing five-year fixes because payment certainty has real value.
“The right answer isn’t automatically two years or five years. It’s choosing the product that best fits your financial plans, rather than trying to predict where mortgage rates will be in 2028.”
Craig Fish, Director at London-based Lodestone Mortgages, said he is seeing a similar trend.
He added: “We’re seeing a similar shift, though it’s worth remembering product choice comes down to a client’s own circumstances, risk appetite and aspirations, and every broker’s client base is different, so results will vary firm to firm. A two-year fix is a bet on the Bank of England, a five-year fix is a decision to stop betting.
“Among our first-time buyers, that trend towards longer fixes is real, they’re often the most exposed to rate shocks and want the certainty locked in from day one. Wealthier clients on higher incomes tend to go the other way, choosing trackers for the flexibility to overpay without limit.
“My advice depends entirely on the client in front of me: if losing sleep over rate movements would hurt more than losing out on a marginally cheaper deal, five years buys peace of mind. If overpaying and flexibility matter more, a tracker or two-year fix still has a strong case.”
Darryl Dhoffer, Founder at Bedford-based The Mortgage Geezer, said it depends on your credit rating.
He added: “While overall sentiment shifts toward five-year fixes for peace of mind, especially among cautious first-time buyers, my view from the specialist lending side is very different. For poor credit borrowers, a two-year fix will always remain the preferred choice. Fixing for five years traps impaired-credit clients on high rates for far too long.
“A shorter two-year term gives them time to rebuild their credit profile and refinance onto prime rates much faster, where permitted. Uncertain markets make long-term stability tempting, but if you’re rebuilding credit, don’t lock yourself in, and where possible, a two-year fix could be the smartest bridge to a cheaper deal.”
Makes sense
Richard Davidson, Mortgage Advisor at onlinemortgageadvisor.co.uk, said there is value in certainty.
He added: “Yes, we are seeing the same shift, but the first-time buyer number should give people pause rather than reassure them. Those are the borrowers sitting at the highest loan to value, so they are locking in the most expensive pricing on the market for five years, at precisely the point their loan to value is falling fastest.
“Two years of capital repayments plus any movement in house prices can drop someone out of a 95% deal and into an 85% band, and that jump usually saves more than a cut in the Bank of England base rate ever would. Nobody knows what rates do next, so this is not a right or wrong call, it is a balance between buying security and taking a calculated risk.
“Five years buys certainty and there is genuine value in that. Two years keeps the door open to a cheaper loan to value band. What matters is that borrowers understand which of those two things they are choosing.”
Jamie Alexander, Mortgage Director at Romsey-based Alexander Southwell Mortgages, said rates are expected to ease so a two-year fix may be more sensible.
He added: “The data around first-time buyers choosing five-year fixes makes sense. They are often at higher loan to values, tighter on affordability, and the last thing they need is a rate shock two years in when they are still finding their feet. Certainty has a real value for that group that does not always show up in a rate comparison. But I would not generalise it beyond that. A two-year fix is not automatically the wrong call if rates do ease as expected.
“And a five-year fix is not automatically safe if your circumstances might change. My honest advice is the same for every client. Stop trying to call the market and start with what works for your life. What can you comfortably afford if rates move? How likely are your circumstances to change? The answers to those two questions tell you more than any rate forecast.”
Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, said many are choosing a five-year fix because they have to.
He added: “This is quite an understandable trend given that more borrowers are extending their mortgage options through enhanced affordability schemes, such as Nationwide Helping Hand, that require the borrower to take a five-year deal. In the main, taking a five-year fix is more a necessity than a choice, irrespective of what may or may not be right for the borrower’s needs.
“Locking on longer-term fixed deals allows lenders to lend more, and first-time buyers are attracted to this when they look to bypass leasehold flats and enter the market much higher up the property ladder.”
