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Comment: More certainty over mortgage payments

Homeowners are turning to cost-effective five-year fixed rate deals

Where you see yourself in five years is a clichéd question that many of us have faced in an interview situation. While no one can know what the future holds with any certainty, an increasing number of homeowners are giving themselves certainty over their mortgage payments by fixing for five years.

But where has this trend come from and what does it mean for customers?

Historically, Santander Mortgages has seen brokers advising around 80 per cent of their customers to fix for two years. However, more recent data shows that we are seeing an increase of 10 per cent in the number of people fixing for five years, compared to this time last year. Conversely, the number of people fixing for two years has seen a decrease of around 13 percentage points when compared to 12 months ago.

There are several factors at play which could be influencing both customers and brokers to turn to a five-year instead of a two-year fixed rate deal. First, the gap between two-year and five-year money has meant that a historically large difference in cost between a two- and five-year deal has been increasingly narrowing.

The difference between two-year and five-year money has reduced from over one per cent in 2014, to less than half of that today.

Typical rates offered in 2014 would have been around 1.99 per cent for a two-year fixed rate deal and 3.09 per cent for a five-year fixed rate deal. In practice, on a £250,000 mortgage over 25 years, this meant the difference between a monthly payment of £1,058 on the two-year deal and £1,318 on the five-year deal; over £250 more a month.

However, based on our rates today, which offer a two-year fixed at 1.54 per cent and a five-year fixed at 1.99 per cent, a customer looking to take out the same mortgage would be considering either a £1,005 or a £1,058 monthly repayment, respectively – a difference of just over £50 a month.

In this example, both the two- and five-year fixed rate deal comes with a £999 product fee. However, customers fixing for five years would pay this once, while customers who continue to fix for two years will pay it two-and-a-half times across the same period, a total of £2,497.50, as they review their product more regularly.

The monthly repayment is, of course, just one factor and each customer will have their own priorities when it comes to what is important for their mortgage. We must also mention the uncertain economic environment, within which having certainty over mortgage repayments will, for some, be a welcome comfort.

There is always another side to the story though, and for some customers the flexibility afforded by a two-year fixed rate, or a variable rate mortgage, will outweigh anything else. Locking in a price for five years will bring a longer tie to early repayment charges if the customer wants to sell or move their mortgage in that time.

Essentially, no one knows what the future holds and while it is easy to become fixated on the numbers, we need to take a holistic view of each customer’s needs to help them find the best product.

Graham Sellar is head of business development at Santander

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