This comes at a time when product availability is beginning to return and average rates continue to fluctuate.
Moneyfacts suggest that the rate gap can be used to gauge the level of competition in the mortgage market and the smaller the difference; the more reason for a borrower to consider a longer-term deal.
The latest data shows that 0.27% is the annualised average rate gap for 2020, down by 0.09% compared to the average of 0.36% for 2019 and much smaller than the 0.64% of 2016.
Eleanor Williams, finance expert at Moneyfacts.co.uk, said: “Despite 2020 being one of the most turbulent years the mortgage sector has faced, including a period of enforced shutdown for the property market in spring, recent HMRC data shows that the provisionally estimated transaction levels for December 2020 are 31.5% up on December 2019, and have risen by 13.1% compared to November 2020.
“While some of this surge may be explained by borrowers rushing to meet the stamp duty holiday, there will be other borrowers who may have re-evaluated what they want from their home after enforced periods within their four walls, and who are starting 2021 by considering their mortgage options.”
Looking at the rate gap for today only, this has shrunk to just 0.17%, the lowest this daily gap has been recorded at since June of 2013, around a year after the government launched its ‘Funding for Lending’ scheme, which instilled rate competition in the market.
Williams added: “The annual average two-year fixed rate over 2020 was 2.28%, meaning the rate gap, when compared to the annual average 5-year fixed rate of 2.55%, was just 0.27%.
“This is a low not equalled since 2013, which followed the launch of the Funding for Lending scheme in 2012 and implies that although the cheap funding schemes are drawing to a close, the low base rate environment and demand from borrowers means that lenders are keen for business.
“Historically, 2-year fixed products have been popular with borrowers, however while the economy remains full of uncertainty, some may find themselves ultimately better off with a 5-year fixed rate mortgage.
“Although 5-year deals generally carry higher rates than their two-year equivalents – as borrowers are effectively purchasing the longer-term stability and protection from future interest rate increases these provide – with the gap between the two options currently so low, this may be an opportune time to secure the peace of mind a longer-term fixed rate can bring.
“Those who opt for shorter-term deals such as a two-year fixed will, at the end of their initial term, either face the stress and potential costs and fees involved in securing a new deal, or will revert to their lender’s standard variable rate (SVR) – which at an average rate of 4.41% is likely to see their mortgage payments increase.
“It is also impossible to predict what rates will be available in two years’ time and, as we have seen this past year, unprecedented events can upset even the best laid plans and many consumers have faced unexpected changes to their circumstances that may make refinancing less simple in the future.
“However, it is important to be aware that longer-term fixed rates will not suit all borrowers as these usually have early repayment charges that involve paying a penalty if they move or pay off their mortgage while tied into their initial term.
“Therefore, consideration of any possible changes to future plans when selecting the right product is vital, and the guidance and advice of a qualified adviser could be hugely beneficial in making the right choice for their circumstances.
“While economic uncertainties continue, with wildly differing views on how house prices and indeed interest rates themselves will fare over 2021, it is still vital that the property market keeps moving.
“For borrowers who are concerned about market fluctuations and wish to be able to budget easily, a 5-year fixed rate mortgage can provide some much-needed peace of mind and security.”
