Fresh analysis shows that the majority of mortgage borrowers are currently opting for two-year fixed rate deals.
According to Santander, 60% of customers are selecting two-year fixes presumably in anticipation of interest rates being lower when they come to remortgage in two years’ time.
Less than a quarter of its customers are opting for five-year fixed rate products, even though they are currently cheaper. The remainder are mostly choosing fixes lasting three or ten years, or trackers.
Santander says this represents a significant shift, given that in recent years, its customers have typically chosen a 60/40 split in favour of five-year fixes.
It would appear that many borrowers are hedging their bets on mortgage rates falling over the next couple of years. But are they being overly optimistic about rates falling in the near future? Ravesh Patel, director and senior mortgage consultant at Reside Mortgages, seems to think so.
He explained: “For a long time the UK has had a very low interest rate climate, so it is natural for many people to think that rates would return to such a level again. But times have changed.
“While the Bank of England may eventually lower rates as inflation stabilises, the pace and extent of those reductions are not guaranteed.
“Furthermore, mortgage rates don’t always move in lockstep with the base rate.
“Lenders could keep rates higher due to concerns over economic risks or liquidity. The upcoming Budget is also likely to impact the sentiments in the market.”
Patel suggests more borrowers should be considering five-year fixes, particularly those looking for more long-term stability.
Santander projects that interest rates will drop fall to 3.75% by the end of next year and then remain between 3% and 4% for the foreseeable future. But Graham Sellar, head of intermediary channels at Santander UK, said it is important to keep an eye on swap rates, which influence fixed rate mortgages.
He said: “While base rate doesn’t dictate mortgage rates, it can impact swap rates, which is what lenders pay to financial institutions to acquire fixed funding for a set period of time.
“This means those looking to purchase a property or remortgage may well see rates remaining relatively static compared to the volatility of recent years.”
