The rate gap for 2020 between two and five-year fixed rate mortgages has fallen to its lowest level in seven years, new data from Moneyfacts.co.uk has revealed, which could be good news for potential borrowers considering longer-term fixed rates. A five-year fixed rate mortgage can provide some much-needed peace of mind and security, the report said.
The rate gap calculates the difference between the average two and five-year fixed rates, and can be used to gauge the level of competition in the mortgage market, the report explained.
The smaller the difference, potentially the more reason for a borrower to consider a longer-term fixed deal.
The rate gap for 26 January shrunk to just 0.17%, the lowest daily gap recorded since June 2013, around a year after the government launched its Funding for Lending Scheme, which instilled rate competition in the market, the report said.
The annual average two-year fixed rate over 2020 was 2.28%, meaning the rate gap, when compared to the annual average five-year fixed rate of 2.55%, was just 0.27%.
At 0.27%, the rate gap for 2020 is the lowest Moneyfacts.co.uk said it has recorded since 2013, down by 0.09% compared with the average of 0.36% for 2019 and much smaller than the 0.64% of 2016.
“This.. implies that although the cheap funding schemes are drawing to a close, the low base rate environment and demand from borrowers means that lenders are keen for business,” said Eleanor Williams, finance expert at Moneyfacts.co.uk.
She said it was interesting to note that, despite the average rates increasing for two and five-year fixed mortgages since reaching record lows in July 2020 – 1.99% and 2.25% respectively – the gap between the two is lower at 0.17%, which is “even more positive” for potential borrowers considering longer-term fixed rates.
Williams noted that “despite 2020 being one of the most turbulent years the mortgage sector has faced, including a period of enforced shutdown for the property market in spring, recent HMRC data shows that the provisionally estimated transaction levels for December 2020 are 31.5% up on December 2019, and have risen by 13.1% compared to November 2020.”
She said that while this may be explained by borrowers rushing to meet the stamp duty holiday that ends in March, “there will be other borrowers who may have re-evaluated what they want from their home after enforced periods within their four walls, and who are starting 2021 by considering their mortgage options.”
Historically, two-year fixed products have been popular with borrowers, but while the economy remains full of uncertainty, some may find themselves ultimately better off with a five-year fixed rate mortgage, the study said.
Although five-year deals generally carry higher rates than their two-year equivalents – as borrowers are effectively purchasing longer-term stability and protection from future interest rate increases – with the gap between the two options currently so low, “this may be an opportune time to secure the peace of mind a longer-term fixed rate can bring,” it added.
However, the study warned it is important to be aware that longer-term fixed rates will not suit all borrowers as these usually have early repayment charges that involve paying a penalty if they move or pay off their mortgage while tied into their initial term.
Earlier this month it was reported that UK lenders approved a record number of new mortgages in November, reaching all time highs since the start of the financial crisis in August 2007.
Bank of England data showed that UK mortgage approvals hit 104,969 in the month, up from 98,338 in October, beating expectations of a slowdown in the housing market boom amid the economic downturn.
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