As interest rates rise to new highs, should you fix your mortgage rate now or hold out in hope of them going down? This is a big question facing borrowers who are coming to the end of their fixed mortgage term or who moved onto variable or tracker rates recently while waiting for rates to fall.
Last week, the Bank of England increased the base rate for the 11th time in two years, this time bumping it up from 4% to 4.25%. It is uncertain whether the central bank will raise rates when it meets again in May, but many experts expect that it will.
According to Office for National Statistics figures, more than 1.4 million people have a fixed-rate mortgage that will come to an end in 2023. They will likely have taken out their fixed-rate deal when interest rates were at rock-bottom, meaning they could be in for a nasty shock when they look to remortgage this year.
The question is whether to fix, or plump for a variable rate?
Homeowners face higher mortgage costs
Mortgage rates have fallen slightly in recent months since they spiked after the mini-Budget last October, but anyone looking to re-mortgage and fix now will find their monthly payments will be substantially higher compared to when they took out their last deal.
Meanwhile, around 1.6 million people on tracker and variable-rate deals will have experienced an increase in their monthly payments when the Bank of England hiked rates. For example, a homeowner on a £200,000 tracker mortgage over a 25-year term at a 4.5% rate would have to fork out an extra £28 a month if the most recent interest rate rise was passed on in full, according to the investment platform Hargreaves Lansdown.
Many people opted for trackers amid the mortgage market turmoil following the mini-Budget when fixed rates soared. However, those who took the gamble will have been disappointed by last Thursday’s base rate hike, which will have increased their costs yet again.
But on the plus side, if they do want to fix their mortgage rate now, rates have fallen and there are more products available now than at the end of 2022.
According to the data analyst Moneyfacts, the average two-year fix is 5.32% (compared to 5.44% a month ago), while the average five-year fix is 5% (compared to 5.2%).
Homeowners coming off a fixed-rate deal that do not remortgage soon will end up falling onto their lender’s standard variable rate (SVR), which is the most expensive rate a lender will charge.
SVRs have soared in recent months. The average is now over 7%. Someone coming off the average two-year fix will see their rate rise from 2.57% to 7.12% (the average SVR), according to Laura Suter, head of personal finance at the investment platform AJ Bell.
If you borrowed £400,000, that would translate into a shocking increase of £12,588 a year in mortgage costs – more than £1,000 a month. And even for a smaller amount of borrowing of £250,000, it still means a rise in costs of £656 a month – or almost £8,000 a year, said Suter.
Should you fix your mortgage rate?
Unfortunately, there is no easy answer to the question of if and when to fix because there are so many different variables at play.
The advantage of fixing your mortgage rate for a set period is it helps you to know exactly how much your monthly mortgage repayments will be, which is especially important when many households are struggling to pay bills during the cost-of-living crisis.
If the Bank of England’s base rate rises again, your mortgage repayments won’t be affected. In other words, your monthly payment will stay exactly the same for the duration of the fixed deal (which is often for two or five years, or could even be 10 years).
But fixed rates may have higher rates than other types of mortgages, and if mortgage rates go down soon, you could end up paying over-the-odds on a fixed-rate deal for several years.
Many homeowners are left wondering whether they should hold off fixing until rates come down and instead go for a variable rate or a tracker mortgage.
One option is to fix your mortgage rate for two years instead of five years if you are not keen to fix at high rates for a long period, or choose a short-term variable rate.
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, predicts that the Bank of England will slash rates in the second half of the year as inflation falls off a cliff.
“This means it's a terrible time to fix your mortgage rate as you'll be locked into rates now as you watch borrowing get cheaper around you. I would be talking to clients about opting for a two-year variable and reviewing where fixed-rate deals are then,” he said.
The average two-year base rate tracker mortgage rate is currently 4.98%, according to Moneyfacts.
The consultancy Capital Economics predicts that the Bank of England will hike rates once more in May, to 4.5%, before cutting rates to 3% in 2024.
However, no one has a crystal ball, and forecasts often turn out to be wrong. Recent years have also shown us that extraordinary events (hello Covid crisis, super-high inflation, a prime minister merry-go-round, to name just a few) can have a huge impact on the economy and the direction of interest rates.
Choose a deal that’s affordable and suits you
The “fixing your mortgage” dilemma depends a lot on what fixed rate you will be offered now. Some lenders have reduced their fixed rates, offering competitive products below the base rate (currently 4.25%).
For example, Nationwide Building Society cut the rates across its fixed and tracker mortgage range by up to 0.45 percentage points last Friday. Its five-year fixed rate at 75% loan-to-value with a £999 fee is now 3.99% (reduced by 0.35 points).
Deciding whether to take a fixed rate also depends a lot on your situation, circumstances and other risk factors. You need to decide whether you are prepared to take on uncertainty in the short term or prefer to have certainty of two or five-year rates.
Gary Boakes, director at the financial adviser Verve Financial, said over the past few months fewer people have taken tracker rates as the margins between fixed rates closed. He added: “With the possibility of the base rate dropping next year then there is definitely an opportunity to save money if you are happy with the uncertainty. However, if you are going to worry every time the Bank of England’s monetary policy committee meets [to set the base rate] then is it going to be worth it?”
It will largely come down to whether you can face the risk of more rises in the short term in return for a better deal further down the line. Some people will have wiggle room, but others will require more certainty.
Jonathan Burridge, founding adviser at the mortgage broker We Are Money, warned that predictions are either “lucky or wrong”, so deciding when to fix based upon your own or others’ forecasts “carry risks”.
“If you have a budget in mind for your mortgage payment then try and work to it. This may determine not only the fixed-rate term but the overall term of the mortgage. If you are lucky enough to have savings, can you use those savings to reduce your mortgage or offset the interest you are being charged?” said Burridge.
It is essential your mortgage is affordable and suits your own circumstances. For example, if you are planning to move in a year or two, it is probably unlikely that a five-year fixed rate is sensible as otherwise you’ll have to look into porting the mortgage or pay an exit penalty.
Start shopping around now before your fixed term ends
If you are within six months of the end of your current fixed-rate mortgage, you could start shopping around to find the most attractive deal, and then if a cheaper one pops up before your current end date you can always switch deals.
Because you are not tied to mortgage contracts until signing them, you can hold off signing it for a while and then switch if a cheaper one becomes available.
Mortgage offers are typically valid for between three and six months, depending on the lender.
Do check in case there is a fee to pay for switching deals like this.
If you’re feeling confused or overwhelmed, consider speaking to an independent mortgage broker who can help you find the right type of mortgage best suited to your needs.
