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.
Mortgage rates have been edging downwards recently, in part thanks to the Bank of England’s cut to interest rates on February 6. However, at it’s most recent Monetary Policy Committee meeting on March 20, the Bank chose to hold rates at 4.5pc, and there are a number of factors that could slow its progress in cutting rates further.
Inflation is one of them. The latest figures showed that the Consumer Prices Index (CPI) measured 3pc in January, up from 2.5pc in December. This rise was higher than expected, and significantly above the Bank’s target of 2pc.
Markets have been pricing in the anticipated effects of increased government spending following the plans Labour set out at its autumn Budget, which are expected increase inflationary pressures and slow the pace of future rate cuts. Indeed, the Government’s decision to impose 20pc VAT on private school fees is one of the reasons behind the latest inflation rise.
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 remained broadly steady in recent weeks, at the time of writing they are at 5.33pc for a two-year fix, and 5.18pc for a five-year deal, according to the analyst Moneyfacts. The average two-year tracker, meanwhile, is 5.19pc.
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 4.11pc, offered by HSBC according to Moneyfacts. It is available for buyers with a 40pc deposit or equity, and has a £999 product fee.
Fix for five years, and one of the cheapest rates available is 3.98pc, 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.
Justin Moy, managing director EHF Mortgages, says 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: “For borrowers choosing between a two-year or five-year fixed mortgage, several factors must be considered. A two-year fix allows for an earlier reassessment, potentially capitalising on future rate cuts. However, it also carries the risk of refinancing in an uncertain market, where rates could be higher than expected should we not see expectation materialise at the end of the term.
“More frequent refinancing may also incur additional costs, including arrangement fees, valuation charges and legal expenses, which can offset potential savings.
“Additionally, personal circumstances play a key role – those planning to move for example may prefer the flexibility of a shorter fix, while those seeking stability may opt favour a longer-term deal.”
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.
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.
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.”
