The lower mortgage rates that everyone was expecting this year are not here yet, so anyone coming to the end of a fixed deal faces a tough choice.
Some 732,000 deals will end in the second half of this year, about 153,000 this month, according to the Financial Conduct Authority, the City regulator. And many of those borrowers are in for a shock.
Anyone who fixed their rate five, three or even two years ago is likely to have had the pleasure of paying less than 2.5 per cent interest on their loan. For more than a decade, until 2022, rates were at rock bottom, with many deals at about 1 per cent.
Now, the lowest rate for someone remortgaging is a 4.36 per cent five-year fix from NatWest. If you want to fix for only two years, the best you can get is 4.76 per cent, also from NatWest. You need a 40 per cent deposit for both and they have fees of £1,495.
Someone with a 25-year £200,000 mortgage at 2.5 per cent would have monthly repayments of about £900 a month. A new deal at 4.36 per cent would cost them an extra £200 a month (£1,100), while 4.76 per cent would mean repayments of about £1,150.
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Analysts expect mortgage rates to fall soon, in line with a drop in the Bank of England base rate that has been on the cards for months. The Bank rate rose steadily from December 2021 as the Bank tried to limit spending and get inflation under control, but it has been held at 5.25 per cent since August last year. Inflation for the year to May was down to the Bank’s target rate of 2 per cent, raising hopes of a Bank rate cut, but the policy setters on the committee have yet to budge.
Most economists still expect two 0.25 percentage point cuts to the rate this year — in August and November — with more to come next year if inflation stays low.
So, what should you do if your rate is ending: lock in another fix at a high rate or take out a tracker and wait for rates to tumble? If you do fix, do you go long or short? We look at your options.
Variable rates
Tracker mortgages offer flexibility if you don’t want to tie yourself in to a long-term fixed rate. They often have no early repayment charges, so you can ditch them at any time and move to a fix if rates come down.
But variable deals come at a price. They are usually set a few percentage points above the Bank rate, and they move in line with its changes.
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The lowest rate at the moment is Nationwide’s Bank rate plus 0.19 per cent, so 5.44 per cent. It has a £999 fee. Lower rates are available if you go through a broker, but they all have higher fees.
If you plan to take a tracker for only a short while, paying a fee may seem ridiculous. The cheapest tracker without a fee is 0.84 percentage points over Bank rate (so 6.09 per cent), also from Nationwide.
Someone with a 25-year £200,000 mortgage would pay about £160 a month more on the 6.09 per cent tracker than they would on the 4.76 per cent two-year fix, but the fixed rate would cost them £1,495 in fees.
If they stayed on the tracker for less than ten months, it would be cheaper than the fixed deal.
If they stuck with the tracker for longer, it would be more expensive than it would have been to take the fix, assuming the Bank rate does not go down.
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For the tracker rate to be lower than the 4.76 per cent fixed rate, Bank rate would have to be below 3.95 per cent.
• Dreading your remortgage? It may not be as bad as you think
You can get higher fixed rates that come without a fee, and they are always worth considering — do the maths to see what works out cheaper in the long run.
Jamie Lennox from the broker Dimora Mortgages, based in Norwich, said that trackers were mostly taken out by borrowers who were planning to move house soon, not by those seeking lower rates.
Remember that even if Bank rate falls as low as 4.25 per cent in the next year, this does not mean that fixed mortgage rates will follow suit — lenders don’t tend to pass on any rate changes immediately, while some will have already dropped rates in anticipation of a change.
Fix for two years or five?
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Lennox said that many clients were reluctant to fix long-term deals because of the expectation that rates will come down. Some 55 per cent of mortgage applications he has done this year have been for two-year fixes.
Those fixing for five years were either wanting extra borrowing, because many banks will be more generous if you fix for longer, or first-time buyers buying with smaller deposits who want to reduce the risk of being in negative equity if house prices fall before they need to remortgage.
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The mortgage broker Kylie-Ann Gatecliffe said about 70 per cent of her clients were taking two-year fixes. “Many are convinced that when things have settled after the election rates will start to reduce, so they do not want to fix for longer,” she said.
To make up the roughly £50 a month difference between repayments on the best two-year and five-year fixes from our earlier example (about £1,200 more for the shorter deal over two years), the borrower coming to the end of their two-year fix would need to lock in a new deal at about 4 per cent. This does not factor in their smaller loan balance, or the fact that they may have to pay two sets of fees.
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Scott Taylor-Barr, who runs a mortgage broker in Leicestershire with his wife, Jeanette, said many of their clients were still fixing for five years. Anyone taking a shorter deal at a higher rate “needs to be happy to pay more now in the hope that rates will drop enough in two years to get a fix at well below today’s five-year rates,” he said. “Not many are happy to take that bet.”
