Two-year fixes bounce back in popularity

Two-year fixes bounce back in popularity

LMS has reported that demand for two-year fixed deals increased for the first time in four months following the interest rate rise on 2 November.

After declining from a 30% market share in March to a 20% market share in October – the second lowest figure on record – demand rose in November, with two-year fixed deals making up 23% of all remortgages.

LMS says the increase in the market’s appetite for two-year fixed deals – the largest since March – is a first glimpse at the new interest rate environment and its effect on borrower behaviour.

Conversely, demand for five-year fixed deals has decreased for the first time in 10 months, falling from last month’s record-high of 50% to 43% in November.

Nick Chadbourne, chief executive of LMS, said: “By finally moving to increase the Bank Rate, the governor of the Bank of England seems to have left people concerned about how they are going to handle the next two years instead of trying to forecast how they can handle the next five. Having searched for certainty in the run up to the rate rise, consumers are now looking at what’s in store for them more immediately.”

LMS said consumers are adapting to this evolving landscape now that the rate rise has become a reality, reassessing the different options and doing what they can to lower costs over the medium term. In every region of the UK, mortgage terms increased in November as people looked to lower monthly payments. In October, before the rate rise, the opposite was true, with mortgage terms shrinking in every region across the UK.

As a result of the increase in two-year fixed rate deals and longer terms, 84% of November’s remortgagors saw their mortgage repayments fall indicating borrowers are taking action to lower costs.

In this evolving landscape, lenders will have been adapting their portfolios to meet changing demand and, in November, the average mortgage rate on five-year fixed products increased by 0.12%. But with rates for two-year fixed products rising even by a similar amount (0.13%), the increased appetite for two-year fixed remortgages appears to be demand, not supply driven.

Chadbourne said: “As with any new lending environment, there is always a ‘settling-in’ period. The bounce back of two-year fixed deals is an interesting start but as consumers become accustomed to the potential rate hikes ahead, demand may shift again. These are interesting times and borrowers’ behaviours are likely to continue to change.”

While five-year fixed products have become less popular recently, historically demand is still very high. While the 43% market share in November is a decline from October’s 50%, it is still the second highest figure on record and a world away from the 7% market share seen last November.

When LMS asked remortgagors if they expect another rate increase, 88% of respondents said they thought another hike will occur within the next year.