After a tumultuous couple of years, mortgage rates are much more settled than they have been – but borrowers aren’t out of the woods yet.
After a few weeks of edging up, mortgage rates are now falling, with several lenders in a pre-Christmas price war – but it remains to be seen how long they’ll fall for.
Following the latest inflation figures, which show that the Consumer Prices Index (CPI) measured 2.6pc in November, up from 2.3pc in October, there is thought to be very little chance of any further Bank Rate when the Bank of England’s Monetary Policy Committee meets tomorrow.
Markets have been pricing in the anticipated effects of increased government spending following Labour’s autumn Budget, which are expected increase inflationary pressures and slow the pace of future rate cuts.
Here, Telegraph Money explains what the current economic outlook means for your mortgage – and whether now is a good time to get a fixed deal.
Average rates for fixed deals have been falling gradually over recent weeks, currently at 5.46pc for a two-year fix, and 5.23pc for a five-year deal, according to the analyst Moneyfacts. The average two-year tracker, meanwhile, is 5.47pc.
Some people may find they’re offered similar rates for both types of mortgages.
One of the cheapest two-year fixed-rate mortgages available across the UK for someone remortgaging is now 4.14pc, offered by TSB according to Moneyfacts. It is available for buyers with a 40pc deposit or equity, and has a £1,495 product fee.
Fix for five years, and one of the cheapest rates available is 4.07pc, from Lloyds Bank, again for those with 40pc equity. It has a £999 product fee.
Meanwhile, tracker mortgages – which are directly linked to the Bank Rate – could be the right choice for some people, particularly in the light of the recent Bank Rate cut and the hope of further reductions in the future.
The benefits of a tracker mortgage are that they are transparent, you can make the most of Bank Rate reductions and there’s no early repayment charges if you decide you want to make the switch to a fixed-rate deal. However, rates will also go up with any Bank Rate increases, and you might not end up with the cheapest deal.
Chris Skyes, of broker Private Finance, said: “Generally, the only clients that I’m recommending trackers to are those that feel interest rates should reduce faster than the market predicts, or those that need the no early redemption charge feature that trackers hold.
“There are fixed rates over 1pc better than the best tracker in the market at the moment, so getting that instant saving is much more attractive for a lot of people than a potential saving in the future with the tracker.”
Justin Moy, managing director EHF Mortgages, agrees that the “best” deal depends on your attitude to risk: “A nervous borrower who does have concerns about fluctuating rates, and cannot cope with potential increases, will normally be better with a fixed deal, possibly short-term,” he said.
It is important to remember that the lowest interest rates do not necessarily equate to the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
This depends on a lot of factors, including your need for bills to stay the same for the long term, your likelihood of moving and the economic outlook when you choose a deal.
Most common fixed-rate deals last for two and five years; while five-year deals can be cheaper, you run the risk of being stuck on an overpriced rate if borrowing becomes cheaper during the term of the loan – but if rates rise during that time then you’ll be protected.
The cost of borrowing this year will remain inflated, serving as a shock for households coming off rates fixed two or five years ago.
Nicholas Mendes, of broker John Charcol, says: “The Bank of England’s final monetary policy decision for the year is scheduled for December 19, with the first review of 2025 set for February 6. Following [November’s] rate cut, the Bank is anticipated to adopt a more measured, quarterly pace for future cuts. This pause allows time to assess the economic effects of increased government borrowing announced in the recent Budget.
“Market expectations have adjusted accordingly, with forecasts now suggesting two or three rate cuts in 2025, down from earlier projections of four or five. Given that tracker mortgages are typically priced 0.5pc to 1pc above the Bank Rate, any expected reductions in rates are likely to be gradual.
“For many borrowers, opting for a 2-year fixed-rate mortgage may be more cost-effective unless substantial overpayments (above the typical 10pc annual allowance) are planned.”
If you need to remortgage in the next three to six months, it may be possible to secure a new mortgage deal early, which will still be valid by the time you need to actually make the switch.
However, some lenders have recently reduced the length of their “lock-in period” for loan offers, so be sure to check how long you’ll have to ditch and switch if you see a better offer elsewhere.
Mr Mendes said: “It’s important to consider that some lenders have reduced their typical six-month validity period; for instance, Nationwide still offers 180 days, but others – like Santander and Halifax – have shortened theirs to four months (120 days).”
Locking in a new deal now – whether it’s for a tracker or a fixed-rate – may shield you in case of any unexpected rate rises. After all, if the past couple of years have taught us anything, it’s that the mortgage market can turn in a very short period of time.
Having a new mortgage lined up ahead of time will also save you from spending any time on your lender’s standard variable rate (SVR), which will almost certainly charge far more interest than any fixed or tracker options.
David Hollingworth, of broker L&C Mortgages, said: “Once an application is made a deal will be secured and that could be done up to six months before the end of the current deal.
“That will mean that borrowers are protected against any further rises in fixed rates, but they can still change to a new deal if rates improve in the meantime.”
It’s a good idea to speak to a mortgage broker to assess your options before making any firm decisions.
If you’re concerned about whether your budget will be able to stretch to higher mortgage costs, talk to your lender.
Sam Richardson, deputy editor of Which? Money, said: “Mortgage lenders are obliged to offer support to their customers, so those struggling to meet mortgage payments should speak to their lender about what help is available. Doing so will not affect your credit rating.
“Further support may come in the form of temporary break from payments, interest-only repayments or extending the term of the mortgage.”
