Should you stick with your lender's SVR for a while or opt for a fixed rate now? We run through the mortgage options for borrowers coming to the end of their deal.
Huge numbers of mortgage borrowers are coming to the end of their fixed or variable-rate mortgage deals in the next few months.
And given the turmoil we have seen in the mortgage market of late, they are faced with a testing range of options.
The fallout from the Government’s mini Budget has seen huge numbers of mortgage products pulled and then relaunched at much higher interest rates.
That means many borrowers whose deals are about to expire are in for a nasty shock, with all available products costing far more than the one they're currently on.
So if you’re coming to the end of your deal, what are your options? And what are the pros and cons of each?
Sticking with your SVR (for now)
When you reach the end of your initial fixed or variable rate, you then move onto your lender’s standard variable rate (SVR).
In usual times, doing so is not exactly recommended ‒ the rates are set by the lenders, and can be changed at any time, no matter what is going on with Bank Base Rate.
As a result, even if Bank Base Rate doesn’t move, you could still see the interest charged on your mortgage ‒ and therefore the size of your monthly repayments ‒ increase frequently.
That level of uncertainty is bad enough, but SVRs have long been set substantially higher than the sort of rates you would pay on a new fixed rate, meaning you have the unpleasant combo of a jump in repayments, with the threat of further hikes at any time.
The average SVR charged by mortgage lenders hit a 13-year high over the summer, but the sharp rise seen on the fixed-rate mortgages on offer means that, in some cases, there isn’t a huge difference between them.
For example, right now the lowest two-year fixed rate mortgage on offer at 80% loan-to-value comes from Danske Bank, at a rate of 5.33%. But its own SVR is 5.45% ‒ not exactly a huge leap.
Given this, some borrowers may be tempted to hold fire on remortgaging when their fixed term ends.
The thinking goes that by holding off for a few months, the market may settle down ‒ why sign up for a new fixed rate today, if delaying it by six months means you get a lower rate?
The downside of course is that you will have to cope with those higher repayments in the meantime, with the perpetual threat that they will go up even further should your lender increase their SVR.
There is also no guarantee that things will particularly improve in the next few months ‒ it may be that delaying simply means that when you do bite the bullet and remortgage, you end up on an even costlier deal.
Go for a short-term fixed rate
There was a time when the UK mortgage market was dominated by the two-year fixed rate. And while they have dropped off in popularity somewhat, they remain a compelling choice for plenty of borrowers.
The idea is that you secure a decent rate for a couple of years, and can then (hopefully) shift to an even better deal two years down the line.
However, the rates on offer on two-year deals have rocketed over the last couple of weeks, in the fallout from the mini-Budget. As a result, securing one today will be far more expensive than it would have been back in September.
The good thing with any fixed rate mortgage is the certainty it provides. With a fixed rate, you can be certain of the size of your mortgage repayments for a set period, which makes budgeting far more straightforward.
Given the challenges faced through costs rising on virtually everything else we buy, having that certainty around the biggest monthly outgoing is a compelling idea.
It also provides some breathing space from the current market turmoil, meaning that in a couple of years you can look once more at getting a new rate which will hopefully be a little more budget-friendly.
The downside of course is that, as we have seen, things can move quickly.
There is a danger that signing up for a costly two-year fixed rate right now is simply locking yourself in to an expensive deal, when holding off might mean a cheaper rate a couple of months down the line.
The longer-term fixed rate
Recent years have seen the two-year fixed rate fall out of favour with the majority of borrowers, to be replaced by the five-year fixed rate.
With rates so low, snapping up the certainty of a cheap rate for a longer period ‒ avoiding the additional costs and hassle that come from remortgaging every two years ‒ made all the sense in the world.
The pricing of five-year deals still makes them appealing on that basis against two-year fixes. According to Moneyfacts data last week, the average two-year fixed had a rate of above 6%, while for five-year fixes it stood at 5.97%.
Paying less for added certainty, what’s not to love?
There is a potential downside to consider, however.
A five-year fixed rate means you are locked in for longer, obviously, which is great if rates are rising since you are protected.
But if things settle down and rates start to fall, then you may be left looking longingly at the rates you could have bagged instead had you held off for a couple of months.
What should I do?
Ultimately, there’s no right answer here.
It will all come down to your own circumstances and your attitude to risk.
Some will be happy to hold off making a decision, taking their chances with rates dropping lower than their current level within a few months.
However, if you aren’t comfortable taking that risk, then it makes sense to opt for a fixed rate, though the length will depend entirely on how you think rates might change in the next couple of years.