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The Great 5-Year Fix

ended 04. September 2022

As more lenders price their 5-year fixes cheaper than their two-year fixes, are they doing this due to a) swap rates and broader economic/rate forecasts, b) to boost service levels, c) to help beleaguered borrowers or d) because they're betting that Bank Rate will come back down if we enter a protracted recession leaving borrowers on a higher rate and staring down the barrel of an ERC if they want to get out of it? In short, is the shift to cheaper 5-year fixes a sign of market forces pure and simple, lender benevolence, administrative issues or Machiavellian opportunism? Or perhaps it's a mixture of all of them? 

5 responses from the Newspage community

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Editor
Mike Staton
Director at Staton Mortgages
I have seen a huge increase in clients requesting 5-year fixed rates and amid the cost of living crisis it's easy to understand why. I believe that lenders have noticed this, too, and for the first time in my career as a mortgage adviser, I am seeing 5-year fixed rates cheaper than 2-year fixes. I truly believe this is a case of lenders using a state of fear to benefit themselves. I think it's a great business opportunity and I feel they see it as a win/win situation. Should interest rates drop within the 5-year period, we will see customers paying more on these fixed rates than what will be available on the market. Borrowers seeking to exit would then need to pay a huge early repayment charge, which is typically larger on a 5-year fixed rate, should they wish to come out of that loan. With the current uncertainty in the market, a 5-year fixed rate is a gamble. Always ask yourself: what will I be doing in the next 5 years with my life, and if you can't answer that then maybe a 5-year fixed rate isn't for you. In my opinion, you will always lose to the mortgage lender, you just get to choose how you lose.
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Imran Hussain
Director at Harmony Financial Services
The main reason for some five years fix deals being cheaper than two years is mainly driven by swap rates and market forces. If rates do drop during a potential future recession, then clearly borrowers who have fixed for an extended period could be facing a chunky early repayment penalty if they want to get out of their existing deal to move to a cheaper one. In short, anyone looking at fixing a mortgage right now is taking a gamble as it's impossible to know where rates are headed. However, history dictates that during recessions, rates tend to dip to increase business activity and stimulate growth so it's more important than ever to seek advice to cover all bases.
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Edward Checkley
Managing Director at Advias
Lenders will secure a tranche of funding before pricing their rates, therefore we need to look back at SWAP rates from circa a month ago to understand current mortgage rates. On 2nd August, a 2-year SWAP was 2.53% and 5 years was 2.21%, however, the best 2 year fix is 3.24% and 5 years is 3.45%. The cost of borrowing for a lender may not be linked to SWAP rates if the funding comes from the institution's own balance sheet, i.e. savers' deposits. This could be more common for building societies or specialist lenders. Other factors affecting lenders pricing are market competitiveness and service levels. We have seen lenders price significantly above SWAP rates in recent weeks and months to deter new applications as they struggle with the influx of applications from borrowers looking to secure longer term mortgage rates. Therefore the larger margin placed on 5-year money could be their form of deterring applications from these borrowers, which is the majority of the market, with the aim of improving service levels. 
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Ritesh Sood
CEO & Founder at Soul Mortgages
I would say the shift to cheaper 5-year fixes is predominantly based on SWAP rates as the financial markets predict greater risk over the next few years and a more settled outlook in five to 10 years’ time. Whether or not we see a return to cheaper rates will depend on how economic forces play out in the next one to two years as the economy enters a potentially difficult time. Also, a move away from LIBOR swaps to BBR and SONIA has affected longer term pricing.
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Jamie Thompson
Mortgage Broker at Jamie Thompson Mortgages
5-year rates being lower than many 2-year rates is nothing to do with lender benevolence. These banks are money-making machines, not charities. Why wouldn’t they want to lock you into a 5-year fixed product, or even longer? Take a look at Virgin Money who in the hight of the pandemic were one of the first lenders to come back with 10% deposit mortgages (90% LTV) but the minimum fixed period was seven years. Seven! A few months later rates were half of what they had just locked people into for seven years. And if the borrower does need to leave the lender then the lender is indifferent with a 5% penalty on the balance repaid. Easy money.vWhen selecting an initial term it’s more important for a borrower to look at their own circumstances than the difference in interest rates between 2 and 5 years. Small differences in monthly payments are obliterated if you need to pay an early repayment charge.