Demand for shorter-term fixed mortgages holds firm as rates begin to fall

Borrowers are continuing to favour shorter-term fixed-rate mortgages as rates slowly retreat from their recent highs, according to analysis of mortgage search activity on Moneyfactscompare.co.uk.

• The overall share of users comparing two-year fixed-rate mortgages increased from 48.4% in February to 55.9% in June.
• Demand for five-year fixed deals fell from 27.7% to 22.9% over the same time. 
• The increase is strongest among remortgage borrowers, where demand for two-year fixes has risen from 59.5% to 66.5%, and homemovers, up from 40.9% to 52.1%.
• For borrowers with more equity (lower LTVs), two-year fixed rates are now generally cheaper than equivalent five-year deals. However, borrowers with smaller deposits (higher LTVs) often still find five-year fixes offer the lower rate, leaving them to weigh up the trade-off between cost and flexibility.

Mortgage term demand by buyer type

Average New Mortgage Rates by term and LTV

Adam French, Head of Consumer Finance at Moneyfactscompare.co.uk, said:

"Borrowers are still reluctant to lock themselves into longer-term deals and instead are favouring the flexibility of a two-year fix as expectations for lower mortgage rates continue to build. However, it isn’t an approach without risk. As recent years have shown time and again, our volatile times can have a rapid effect on borrowing costs. 

"The shift is also being supported by pricing. Borrowers with more equity will typically find that two-year fixed rates are now slightly cheaper than comparable five-year deals, making shorter fixes attractive for those looking to refinance again if rates continue to improve. 

"However, first-time buyers and borrowers with smaller deposits are facing a different market. At higher loan-to-value ratios, five-year fixed mortgages often continue to offer lower rates than comparable two-year deals, meaning these borrowers must weigh the lower initial cost against the flexibility of a shorter fixed term. That may help explain why first-time buyers appear to be diversifying their choices rather than overwhelmingly switching to two-year fixes."