Story for The Times: Borrower behaviour - 2 or 5-y, fix or variable?

As a portfolio landlord taking out several mortgages in the current market, here are my thoughts on the 2Y vs 5Y debate.

2YF mortgage:
- Lower interest rates: Two-year fixed-rate mortgages will often be cheaper
- Flexibility: Landlords have the opportunity to reassess their mortgage options in two years. This is preferred if rates decline soon.
- Potential downside is the refinancing costs every 2 years. New product fee, new conveyancing etc

5YF mortgage:
- Stability: This is the biggest advantage of 5YF - knowing that your payments will remain the same for a longer duration, regardless of any potential interest rate increases.
- Protection against rate rises: If you believe we are the peak, there's no point fixing on a 5YF when rates are at the top.
- Easier Stress Test: Most lenders would stress test 5YF at pay rate, instead of inflated rates, so deals often stack up a lot more with these.

Things that ultimately matter: personal circumstances, risk tolerance, and market conditions

In most cases, we're advising either a 2-year fix or discount variable mortgage. There's every chance both the Bank of England base rate and mortgage rates will be lower in a year to 18 months time, once inflation is firmly back in its box.

That said, some lenders permit a higher maximum borrowing amount if you fix for five years or longer. As ever, it all comes down to the borrower's circumstances and risk appetite.

We have found it has been very much a mixed bag. Around twelve months ago when the consensus was that rates wouldn't go much above 4% and that the base rate would start to fall around the end of 2023 trackers were very popular,

As rates kept increasing at the end of 2023 two year fixes became more popular as people wanted the security of knowing that their payments wouldn't change in the short term whilst gambling that rates would come down by the time their deal came to an end.

In the early part of 2023 as lenders were making rates cheaper again we found client's were happy to potentially fix for five years if they could get a rate that started in the low 4 or high 3% range.

Now as rates are on the rise again more borrowers are definitely opting for two year fixes. Giving them the benefit of knowing no increases in the short term and also the hope that if rates fall from these highs during late 2024 to 2025 they may be able to benefit.

At the moment we're finding more people tending to opt for 2 years terms. They're choosing these options with hope in their heart that rates will be lower at remortgage time . So, it's easy to see why people are weighing up their situation this way, in light of a volatile environment.

What hasn't changed at all, is that each decision is very specific to each client. Everyone has their own goals, needs, budget, and future plans, and we look at giving fully-rounded advice based on these.

As a consequence of the mortgage rate crisis that we are travelling through we are seeing optimistic clients opting more for 2-year fixed rates, the idea being that they feel that we should be through this period within that time and they will be presented with a much better choice of 2/3/5/10 year fixed rates in 24 months time. We are seeing no clients gambling on taking the variable rate option from their lenders as mortgage account holders do feel that if the inflation figure doesn't seriously drop soon then the potential for more Bank of England increases in the short term is on the cards.

Whilst everyone is different there still seems to be a good portion of people not wanting to tie themselves in for too long at what they perceive as a high point in interest rates. Their priority is doing something shorter-term so they aren't getting as hammered on the lender's standard variable rate whilst keeping the option open to re-assess without penalty when they think rates may have come down.

For BTL, 5 year fixed just so they can meet the loan amount! Standard resi though, I'm finding people still like the security of a 5 year fix, but there are some 2 year ones going through too.

Stability in the near term remains a principle objective for most borrowers with the gamble of variable and discounted trackers or similar perceived as too much of a risk for the majority with fixed monthly payments preferred for easier budgeting.

A clear trend in recent weeks has unquestionably been for the shorter 2-year initial deals to be more popular as clients appear willing to trade the higher rates and associated monthly payments these currently offer for the opportunity to re-assess their options in a couple of years' time with optimism and hope for lower rates and different market conditions prevailing in 2025.

Different types of borrowers are, however, forming notably different outlooks in this regard with those who are purchasing - and particularly for the first time - far more inclined - than those existing homeowners remortgaging from lower rates - to favour sacrificing rate flexibility in a couple of years for the longer term stability of a five year deal.