5-year fix popularity could boost second charge appeal

This year there is a strong chance we will see 5-year fixed rates overtake 2-year fixes as mortgage borrowers’ preferred choice of product.

Until recently, 2-year fixes have reigned supreme, yet as 5-year fixes have started to fall in price, we have seen their popularity rise.

Fewer than three in ten borrowers opted for a 5-year fix in 2017 according to UK Finance, yet this grew to around 45% of borrowers in 2021.

This could increase further still as the cost of living rises and mortgage borrowers look to lock-in for repayment stability over a much longer term.

The recent news that one of the UK’s largest mortgage lenders – Halifax – is now offering some comparable 5-year and 10-year fixes cheaper than their 2-year counterparts is also likely to add further fuel to the popularity of long-term fixes fire.

Halifax is offering 60% LTV 5-year and 10-year fixes at a rate of 2.48%, compared to 2.54% for a 2-year fix.

If, as some assume, other lenders follow suit and lower their long-term rates, this could signal the dawn of a new era for the prevalence of long-term rates.

This would likely have repercussions for other sub-sectors of the mortgage market – the remortgage and second charge market being two of them.

Five years is a long time – 10 even longer – and even for those borrowers with the best laid plans, unforeseen circumstances might dictate they need to look to raise additional funds during this time and a second charge could prove to be the best option.

An unexpected need for home improvement, debt consolidation, a family wedding or holiday may all call for the need to raise additional funds.

There may also be borrowers who find the equity in their property rises over this time and as a result may wish to take advantage of this by releasing additional funds.

Given that house prices have risen 14.3% in the last 12 months to March 2022 -according to Nationwide Building Society – it is plausible homeowners may see further gains over the next five to 10 years.

If locked into a long-term fix, there may be a substantial ERC to pay if the borrower remortgages before their rate expires, especially if they are only a year or two into their term. In that scenario, it may work out cheaper for borrowers to keep their existing mortgage in place and look to raise additional funds through a second charge.

Borrowers may also not wish to forfeit their mortgage rate by remortgaging. In recent months we have started to see fixed rates in the mortgage market edge up and this could continue, especially if we see more increases to the Bank of England base rate.

While the mortgage sector might see some short-term lowering of longer-term fixes if a rate war ensues, the market consensus is that mortgage rates will continue to rise. This means the rates borrowers are fixing in at today are likely to remain competitive over the coming years – increasing the likelihood they will not want to remortgage.

A second charge mortgage could offer a solution to those tied into their mortgage over a longer period. If you are a mortgage adviser and not already advising on seconds, now is the perfect time to start doing so, in anticipation of such a scenario.

Furthermore, if the trend for long-term fixes does take hold, those borrowers on 2-year fixes who have historically remortgaged every couple of years will now be tied in for longer – potentially negatively affecting remortgage demand.

Advising on second charges might help fill some of the void that a lack of 2-year remortgaging demand could create.

Much like the 5-year-term fixed rate market, the second charge sector has been steadily building momentum over the past few years. As the appeal of long-term fixed rates increase, advisers can no longer afford to ignore the benefits of a second charge.

Kerri Pender is operations director at Evolution Money