With inflation skyrocketing and a potential recession looming, homeowners nearing the end of fixed mortgage deals will be preparing for their monthly costs to skyrocket, in some cases more than doubling.
According to Moneyfacts, the average two-year fixed buy-to-let mortgage offers increased 1.63 percentage points compared to two years ago.
The cheapest buy-to-let interest rates are now over 3 percent. At this time last year, the cheapest deals were charging less than 1 percent.
Rising: With more base rate increases expected, buy-to-let interest rates are expected to continue to rise in the near term
With the future economic climate looking uncertain, homeowners preparing to re-mortgage in the coming months may wonder whether to fix their new agreement for two years, five years, or even longer.
For many, it’s a guessing game of whether mortgages will be more or less expensive two years from now than they are now.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Whether you’ve signed a two-year or a five-year deal, chances are the buy-to-let mortgages available now are significantly more expensive.
‘What you think is going to happen with interest rates can also affect your decision when you remortgage.
‘If you want a simple new mortgage, with no principal increase and the lowest interest rate, then a two-year solution may be preferable.
‘If you anticipate rates to continue to rise, you may prefer longer-term protection in the form of a five-year fix.
Why are the two and five year rates so similar?
The difference between what someone will pay on a two-year contract and a five-year contract today can be minimal.
Virgin Money and Barclays currently offer the lowest two-year rates on the market for homeowners’ remortgage, at 3.2% and 3.23% respectively.
Those remortgaging to five-year deals can get as little as 3.2 percent with BM Solutions or 3.3 percent with Barclays.
The reason why two-year and five-year mortgage rates are so similar has to do with the Bank of England’s expectation of future base rate changes.
This expectation is reflected in the swap rates, which have increased dramatically in recent months due to these market expectations.
Swap rates are an agreement in which two counterparties, for example banks, agree to exchange one stream of future interest payments for another, based on a fixed amount.
Mortgage lenders enter into these agreements to protect themselves against interest rate risk associated with lending fixed-rate mortgages.
Simply put, exchange rates show what financial institutions think the future holds for interest rates.
“A rate swap is, in effect, an agreement between two parties in which one agrees to receive a fixed rate payment and the other a variable,” Harris explains.
“Lenders are essentially hedging their bets against what could happen to interest rates over various periods and an indicator of interest rate expectations.
‘As swaps increase, fixed-rate mortgages tend to increase. Conversely, if they fall, fixed rates tend to follow suit.’
Impact on rates: Exchange rates have affected the interest rates charged on two-year and five-year fixed mortgages available to homeowners
While all swap rates have risen significantly in the last three to four weeks, the spread between two-, five-, and 10-year swaps has increased as well, according to Harris.
And he adds: ‘By the time the Monetary Policy Committee announces a change in the official base rate, the market has already discounted this expectation.
‘Current yield curves indicate that markets believe rates will continue to rise in the short term (two years) before falling again.
“Don’t forget, however, that there are other variables that influence the mortgage rate the borrower actually pays, such as the cash available to the lender in the form of customer savings.”
So how long should homeowners fix?
The swap rates suggest that lenders believe mortgage rates could start to fall again within the next two years, meaning homeowners may be prudent to lock in rates during that period.
Says Harris: “One could argue that a shorter-term product could now be taken with the expectation that cheaper mortgage products will be available in 2024.
“However, the markets are not always right, so you should always act according to your own circumstances, taking into account the level of risk you are willing to take.”
Overall Cost: Although the difference between rates on a two-year contract and a five-year contract may be minimal today, borrowers would be wise to factor in product rates.
Real estate forum, Property Hub, recently surveyed its audience of homeowners and found that 59 percent of them opted for five-year products.
Rob Dix, co-founder of Property Hub, says: ‘Better rates may be available two years from now. However, remortgaging more frequently will incur more set-up fees, which should be balanced by any savings.
“In addition, our own survey results may show that investors value the certainty of locking in a rate rather than waiting to see how the market develops.”
Ultimately, predicting where mortgage rates will be in two, five or 10 years is anyone’s guess.
Owners will need to consider their own goals and expectations when it comes to choosing the fixed term on a new agreement.
There is some expectation that the rise in inflation could be short and sharp, but it is impossible to predict where rates will head.
David Hollingworth, Associate Director of Mortgage Broker, L&C Mortgages says: ‘I hope many will be tempted to commit to a longer term rather than opt for short-term two-year deals.
“The increases have generally been felt most on short-term deals, which means there is often little difference in the cost of five-year rates compared to two-year ones.
‘There is some expectation that the spike in inflation could be short and sharp, but it is impossible to predict where rates will go and homeowners will need to consider the potential benefit of peace of mind from fixing for longer.
Chris Sykes, CTO at mortgage broker Private Finance says: ‘If it’s a long-term investment with a buy-and-hold strategy, I’d suggest a five-year fixed rate.
“However, a five-year deal will not be right for everyone, particularly those who may consider selling in the next few years.
“If there is a risk that they will sell in the next few years, I would suggest a shorter term rate,” Sykes adds.
“Some are opting for short-term fixed rate or tracking rate products out of concern about Government rules for rental properties to have an A-C Energy Certificate rating by 2025, which for some It will be an expensive exercise.”
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