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Emma Simon: Are two-year fixes failing borrowers?

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I am not surprised to learn that most people taking out a mortgage at  present are opting for a fixed-rate deal. But I was more shocked to learn most of these are two-year fixes.

Halifax – the UK’s biggest mortgage lender – is coy about exact figures. But it recently told me that the “vast majority” of its mortgages were on a fixed-rate basis, and the “vast majority” of these are two-year deals.

Other banks, and brokers, report similar trends.

This appears to fly in the face of the common sense. Despite more positive economic and employment news – even the most hawkish commentators are not factoring in a Bank Rate rise until the end of this year; and many stick to saying interest rates will remain at a record low until the end of 2015.

So there is the serious risk those on two-year fixed-rate deals could be paying more than they need to for most of the term (compared to tracker deals), having to remortgage just as rates shoot up.

These mortgage sales figures are driven by our desire to hedge our bets in the face of uncertainty. A two-year fix can seem like a good halfway house – but at present there is the real risk that you end up with the worst of both worlds, whatever happens to interest rates.

So despite a general wariness about longer-term deals, are borrowers being short-sighted considering the rates on offer?

Some of the keenest-priced deals have been pulled in recent weeks, but it has still been possible to get a five-year fix for just under 2.8 per cent. And those wanting a 10-year fix can get a deal for around 3.85 per cent. When you consider that the long term average for mortgage rates is between 4 and 5 per cent these start to look very attractive indeed.

It is not that long ago that five-year fixes hovered above the 6 per cent mark.

Are people going to seriously regret not locking into far lower rates when they had the chance?

All this makes me wonder about how well the mortgage advice market is working – and whether banks and building societies in particular are serving their customers well.

In recent years the market has become overly complex, making it nigh on impossible for consumers to identify the best deal for them. High fees, different rates for different LTV bands and stricter lending guidelines all contribute.

Many will see a mortgage adviser, either at their bank or through a broker. No doubt they can show which deal works out cheapest for the amount the customer wants to borrow.

But are these advisers also pointing out potential pitfalls, or discussing the likelihood of a rate rise? If they were I doubt we would see quite so many people taking out these two-year deals.

Emma Simon is a freelance journalist

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