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After a tumultuous year, there are signs of hope for mortgage borrowers as October’s inflation figures dipped to 4.6pc – with mortgage rates expected to fall further as a result.
Major high street lenders including Halifax and HSBC have announced mortgage rate cuts earlier this week in anticipation of today’s inflation announcement, while Nationwide, NatWest and TSB slashed their mortgage rates last week amid bets that interest rates will start falling from their current level of 5.25pc next year.
It’s now possible to find a two-year fix comfortably below 5pc, while the cheapest five-year deal is 4.7pc.
Huge numbers of home owners have been waiting on “tracker” mortgages for the past two years, hoping for fixed deals to come down before securing their home loans.
With the cheapest fixed deals now below the 5.25pc Bank Rate, anyone currently on a tracker may be wondering if it’s time to switch.
Is it a bad time to fix?
Fixed-rate deals are becoming cheaper, with several big banks cutting their rates in the past few days. While the cheapest fixed deals can already undercut tracker rates, many people may find they’re offered similar rates for both types of mortgages.
The cheapest two-year fixed-rate mortgage is now 4.94pc, offered by Virgin Money, according to Moneyfacts, an analyst. You need a minimum 40pc deposit, and fees stand at £1,780. Fix for five years, and the cheapest rate available is 4.7pc, also from Virgin Money, requiring minimum 40pc deposit and £995 product fees.
However, despite fixed-rate deals getting cheaper, tracker mortgages could still be the right choice for some people.
“I would suggest a tracker would still make sense for a lot of people as the Bank Rate is likely to reduce in the next two years,” said Ashley Thomas, director at Magni Finance, a London-based mortgage broker. “It depends on the situation, whether you have plans to move, and how much risk you are willing to take.”
Justin Moy, managing director EHF Mortgages, agrees that the “best” deal depends on your attitude for 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.
“Both sets of rates are reasonably similar at the moment, so the initial monthly payments should not be a definitive guide to the direction to take. Most trackers products have some form of ‘switch and fix’ option, allowing a borrower to change back to a fixed [mortgage] when they feel comfortable to do so without a penalty, or if rates start showing signs of increase.”
That said, if the Bank of England decides to hold the Bank Rate next month, while fixed rates continue to drop, those with tracker mortgages could find they’re paying over the odds.
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.
How long should I fix for?
The cost of borrowing this year will remain inflated, serving as a shock for households coming off rates fixed two or five years ago. More than 1.4 million borrowers will pay higher rates this year as their fixed deal comes to an end, according to figures published by the Office for National Statistics.
Thanks to promising inflation figures over the past few months, the Bank Rate is not expected to rise any further. Previously, experts feared it may rise to well over 6pc.
David Hollingworth of L&C Mortgages said mortgage rates are expected to continue to fall as a result, with even bigger drops looking hopeful next year.
“Better than expected inflation data should only help to underpin the improvements in rate outlook that has already seen fixed mortgage rates dropping.
“Two-year fixed-rates have edged below 5pc in the last couple of weeks. Five-year rates are nudging closer to 4.50pc, and could dip below that mark in coming weeks.
“I’d expect to see more lenders following the more sharply priced competition, and improvements look set to continue.”
Of course, it’s impossible to know when rates will reach their lowest point. Those who want certainty over their repayments for the foreseeable future may be better off with a longer-term fixed-rate mortgage – but if the next couple of years see rates fall considerably, they may end up stuck on an expensive deal.
Should I lock in a new deal early?
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.
Locking in a new deal now – whether it’s for a tracker or a fixed-rate – may shield you in case of any further rate rises. After all, there are a couple more Bank Rate decisions to come before the end of the year, by which time the mortgage market could look very different.
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.
Mr Hollingworth 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.”
This article was first published on February 2, 2023, and is kept updated with the latest information.