Home borrowers in UK opting increasingly for five year mortgage deals

There has been a resurgence in demand for five year fixed rate remortgage deals in the UK with a rise of 47% in April to represent half of the home lending market, according to new figures.

The month on month growth of 11% means that these deals have reached their highest level in six months, the latest report form conveyancing service provider LMS shows.

The firm says that April’s resurgence is a significant increase from the previous month when five year fixed rate deals made up just 36% of the remortgage market and overall demand for five year fixed deals is 13% higher than April 2017.

This growth in popularity has been driven by an increase in borrowers switching from two year deals to longer term deals as lenders provide more competitive offers to attract long term borrowers.

The average rate for five-year fixed remortgages only increased by 0.01% month on month to reach 2.91% in April, well below the increase in the average two year fixed rate.

The two-year fixed rate increased by 0.04% month on month to 2.43% in April, up from 2.20% in October. This is the highest two year rate since September 2016, as lenders have amended rates to reflect the base rate rise.

The proportion of borrowers consulting an independent mortgage adviser or broker when remortgaging also hit a record high of 78% in April, up from 72% in March.

‘The popularity of five year fixed rate deals rebounded in April, having dipped in the first three months of the year. Lenders are eager to attract longer term business which has created a competitive landscape for customers,’ said Nick Chadbourne, chief executive of LMS.

‘This has ensured five-year average rates have remained relatively flat month on month. As more borrowers seek independent advice when remortgaging, the market is reacting quickly to the shifts in headline rates,’ he explained.

He pointed out that five year fixed rate remortgages will always be popular when borrowers are seeking financial security. ‘Many consumers are now opting for these deals to ensure they have certainty and stability through the potential economic and political upheaval of the next few years,’ he added.

The research also shows that the expectation of a base rate rise in the next year has fallen. The proportion of remortgagors who expect a base rate rise this year has declined to 77%, the lowest level in seven months and down 4% month on month.

However, expectations of an increase in the base rate are still significantly higher than they were in April last year when only 46% of borrowers believed there would be a rate rise in the year ahead.

‘After hints of a rate increase earlier in the year, sluggish economic growth discouraged the Bank of England from raising the base rate. Yet more than three quarters of borrowers still believe another base rate increase will happen at some point in the next 12 months,’ said Chadbourne.

‘The surge in borrowers playing it safe by locking in longer term fixed rates when remortgaging is understandable when the direction of the economy is so difficult to predict. Despite poor overall growth figures, unemployment and inflation are both falling, offering a very mixed, confusing economic landscape,’ he added.

Average remortgage loan amount reached a record high in April at £175,000, up 9% on March’s average of £160,000 and a 10% rise year on year. Property prices have only risen 1% year on year leading to higher loans to value ratios.

The term of a remortgage, as a three month rolling average, increased to 58 months in April, up from 56 months in March. This is the longest term length since July 2016.

‘The average loan size jumped to a new peak in April as consumer take larger remortgages. With comparatively slow house price growth this month, LTV ratios have also increased. To balance the higher LTV ratios, the average term length has increased to the highest level in 21 months,’ Chadbourne concluded.