Fall in demand for five year fixed deals among British home owners

Demand for five year fixed mortgage deals in the UK fell in February to their lowest level since July 2017 as buyers looked for cheaper products, new research suggests.

Overall five year fixed deals dropped to 37% of the remortgage market, down from 45% in the previous month while there was an increase in demand for two year fixed remortgages, according to the study from conveyancing provider LMS.

The proportion of borrowers choosing fixed two-year remortgages has increased to 24% in February, up from 22% the month before, the highest level of two year fixed rate remortgaging in seven months.

The firm suggests that the change could be due to more people looking for cheaper two year deals to balance out the cost of November’s base rate rise at a time when two year fixed remortgages are available with an average fixed rate of 2. 35%.

‘Consumer interest in fixed five year deals has dipped as many borrowers opt for the lower rates on offer from two year products. This is a significant shift from what we’ve seen in recent months, suggesting the popularity of five year deals may have peaked,’ said Nick Chadbourne, chief executive of LMS.

‘The move towards two year deals is likely a result of borrowers offsetting the cost of November’s base rate increase by switching to a shorted fixed rate period when they remortgage. Few borrowers will want to risk a variable rate mortgage with potential increases to the base rate likely to be on the way later this year, but with incomes squeezed, demand for longer term fixed deals has slipped,’ he pointed out.

The research also indicates that home owners are now prepared to remortgage more frequently to get a better deal. In February 2017 some 17% of borrowers expected to remortgage again in eight years’ time, but one year later, just 10% of borrowers expect to wait this long.

Meanwhile, 39% of borrowers are planning to refinance in five to six years’ time, up 11% from February 2017 and a long term shift towards more regular remortgaging can be seen in the surge in total remortgage lending which reached a nine year high in January, increasing 20.3% year on year.

‘In the short term, reports of Bank England’s upcoming rate increase is putting pressure on home owners to move away SVR and remortgage sooner rather than later. The longer term increase in lending is due to borrowers being more aware of the potential savings on offer through remortgaging. There is now much more information on the deals available to borrowers from brokers as well as price comparison sites,’ Chadbourne explained.

The proportion of home owners receiving a lower than expected property valuation for remortgaging purposes increased by 12% in February month on month with the report saying this has been driven by slower house price growth.

‘Home owners are used to house prices rising, so the slowdown in the market may come as a surprise to some. Overall market conditions are still re-balancing following the base rate rise and the uncertain political landscape. This must make accurate valuations more complex,’ said Chadbourne.

‘Homeowners who have not re-mortgaged for five or six years will nearly always be over optimistic and valuers naturally fall on the side of caution. While this increase only represents a single percentage point uplift year on year, it has reached a new milestone. Should the trend continue it will impact overall deal conversion levels, however as the market adjusts it may well balance out,’ he added.