Peter Jackson Eastwood took out a two-year fixed mortgage last year, when we were all living in blissful ignorance of the financial turmoil to come.
At the time mortgage brokers were advising that there was no need to fix any longer, that if rates went up, it would happen very slowly so that homeowners wouldn’t get caught. As we now know, all of these statements turned out to be false.
“We took what we thought was a calculated gamble, but now we bitterly regret it,” said Jackson Eastwood, who works in public relations. Peter, 28, bought a flat in Balham, south London, with his partner, Laura Savage, 30, for £390,000, a loan that he must re-mortgage next year.
“We assumed we would have more money in two years and remortgage at a better rate, but that is highly unlikely to be the case,” he said. “I wish we had taken a five-year fix instead.”
Peter and Laura aren’t the only ones feeling angst from not getting ready any longer.
The average rate for a two-year fix hit 6 percent this week, the highest in 14 years, and the base rate is no doubt rising soon. Homeowners with a £200,000 two-year fixed-rate mortgage will pay an extra £138 a month if they’re remortgaging now. This is just over £1,600 a year.
Andrew Montlake of mortgage brokers, Coreco, said: “There will be quite a few people now who wish they had taken a five-year contract instead of a two-year one, but hindsight is a wonderful thing.”
In the US and some parts of Europe, fixing up for decades is the norm, but not here.
Until recently, two-year mortgages were the British mortgage of choice: in 2016, 57% of people opted for this type of home loan and only 23% opted for five-year mortgages.
But with this financial crisis, that has changed. As of 2021, only 43 percent are going for two and 46 percent for five.
People don’t just lock in five years, either: now 2 percent of loans are deals of five years or more, and the rates are very decent.
Barclays Bank now offers a ten-year deal at a rate of 4.85 per cent on a 40 per cent deposit.
The arrangements currently mean not only that you are less likely to have to re-mortgage in a world of high rates, but in a rare turn of events, five years deals are now cheaper than two years. Barclays offers a two-year loan at 6.34 percent and a five-year loan at 5.94 percent.
People don’t just lock in five years either: xx percent of loans are now ten-year offers, and the rates aren’t bad at all.
Currently, the lowest 10-year fixed mortgage is with Lloyds Bank at 4.43 per cent, although people will have to hold current accounts with the bank.
Peter is one of the sensible ones: he and his partner are planning ahead, putting the extra money they have into our joint account each month as a way to mitigate the extra costs they’ll have to encounter next year.
The financial crisis we are experiencing has accelerated a trend that was already occurring. Data from BuiltPlace, a real estate market research firm run by Neal Hudson, shows a steady rise in people opting for a fixed deal of five years or more since the beginning of 2016.
“Historically, longer fixed rates were more expensive than short-term offerings, but the gap has narrowed in recent years,” Hudson said.
The other attraction was that with longer arrangements, more money could be borrowed. Lenders would stress-test borrowers at a lower rate if they opted for five-year arrangements instead of two. The stress test is when a lender verifies that you can pay a rate 1 to 3 percent above what is being offered to verify that you can afford rate increases. In effect, lenders felt they didn’t have to worry as much about people making long-term arrangements, which meant those borrowers could borrow larger amounts of money.
Montlake added: “Given the high price of two-year deals right now, most people who want a fixed deal will opt for five years or more. Anyone who wants something more in the short term is likely to opt for a tracker. This may change our habits permanently.”
While we may not fix it for 30 years, like people living in the US, the memory of rapidly rising mortgage costs is likely to stay with people for years to come. .
Peter said that if the five-year rates are more reasonable than the two-year rates, he and Laura will definitely take one next year as it will be one less worry.
“We pay £800 a month each and I think if it goes over £1,000 then it starts to look risky. With everything being more expensive, the money seems to disappear.”