At heart, the UK is a nation of bargain hunters. Most of us love the satisfaction of knowing we’ve secured a great deal, whether we’re buying a new car or just doing the weekly shop.
That inherently British mindset helps explain why, for years, the two-year fixed rate was the most popular mortgage product in this country.
At one point, in 2016, two-year fixed rates accounted for more than seven in 10 new loans, according to the Bank of England (BoE).
While the central bank’s data goes back only a decade, I wouldn’t be surprised if that figure was even higher at points in the past.
Two-year fixes will become the cheaper option again
Despite borrowing costs having been so low for so long, our mindset drives us to regularly seek out a better deal — even if it means saving just a few basis points. And committing for longer than a couple of years felt like a barrier to seeking a better deal regularly.
However, a couple of years ago something significant happened: the humble two-year fixed rate was overtaken by its five-year equivalent as the nation’s mortgage of choice. In fact, by December 2022 — a year after the BoE started hiking rates — five-year fixed rates made up nearly seven in 10 new loans.
The reason for that shift is clear: borrowers were locking in for the long term while borrowing costs were still relatively low. And, of course, lenders priced for a greater take-up of longer-term product rates.
But now, with the Bank base rate more likely to go down than up, the opposite is true: borrowers want to avoid locking in at today’s rates for any longer than necessary.
Welcome boost
This has significant implications for the market. After two to three years of subdued activity, there is light at the end of the tunnel, with the shift back to two-year fixed rates likely to provide a welcome boost in remortgage activity in 2025/26 and beyond.
Get in touch and your clients will be better off, while you secure your share of a growing market
Over the past two years, nearly three million borrowers have seen their fixed-rate deal expire. With most borrowers opting once again for shorter-term deals, an even greater number of mortgage deals will mature over the next 12–24 months.
In 2025, an estimated 1.8 million borrowers will be coming to the end of their deal, according to UK Finance. That’s 300,000 more than in 2024. This number could be even higher in 2026 if two-year fixed rates become cheaper than five-year deals again — which they should do.
Since October 2022, two-year swap rates have been higher than their five-year equivalents, which is one of the reasons why two- and five-year fixed-rate pricing has been inverted.
If we don’t engage with borrowers early enough, many will simply select the cheapest rate offered to them by their current lender
However, that’s slowly changing. In June last year, two-year swaps were around 83 basis points higher than five-year swaps. At the time of writing, the difference is just 23bps.
As the Bank rate continues to fall, we expect normal order to resume and two-year fixed rates to become the cheaper option again. This shift will incentivise borrowers to fix for shorter periods — known to be a consumer preference — providing a boost to the remortgage market in the process.
Millions of borrowers were forced to pay mortgage rates of 6%-plus in the wake of Liz Truss’s and Kwasi Kwarteng’s disastrous Mini-Budget. But they’ll find that, these days, the average rate is typically around 5%. In short, these people will be desperate to lock into a cheaper deal and you’ll help deliver a better consumer outcome.
This is something the advice sector must be prepared for. If we are not proactive, we risk missing out on one of the biggest remortgage opportunities in recent history.
We know from the rise of product transfers — which accounted for more than eight in 10 refinance cases in Q2 — that, if we don’t engage with borrowers early enough, many will simply select the cheapest rate offered to them by their current lender.
Borrowers want to avoid locking in at today’s rates for any longer than necessary
While that’s not necessarily a bad thing, we all know that borrowers who take good-quality independent advice receive a raft of benefits.
It’s a win-win: get in touch and your clients will be better off, while you secure your share of a growing market. If you’re not already combing through your client database, now is the time to focus on it.
Rob Clifford is chief executive of mortgage and protection network Stonebridge
This article featured in the December 2024/January 2025 edition of Mortgage Strategy.
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