With many analysts believing Base Rate has reached its peak, mortgage borrowers are now in a difficult spot. Is it worth fixing your rate, or should you gamble on a variable rate?
If you’re looking to secure a mortgage, whether because you plan to buy or need to remortgage your existing deal, there is a big decision to be made.
In recent years the five-year fixed rate mortgage has become the homeloan of choice for millions of us.
The selling points of these deals have been pretty simple. First and foremost you get certainty over the size of your monthly mortgage repayments for a lengthy period.
And while there is a premium to pay for that longer period of certainty, in the form of a higher interest rate, in reality, the difference was pretty negligible.
Why wouldn’t you pay a little more to secure that low rate for five years, when interest rates were only going to head in one direction?
That may be changing though, in no small part due to the latest data on inflation published by the Office for National Statistics (ONS).
Where are rates going?
The latest inflation figures give us a good insight into what lies ahead for mortgage rates.
The persistently high rate of inflation has been the driver behind the increases that we have seen time and again to Base Rate, taking it to its current level of 5.25%.
However, of late the Bank of England has opted to keep Base Rate frozen, in the hope that they have done enough to bring inflation down.
It seems to be working too, with inflation dropping to 4.6%, suggesting that Base Rate has now peaked and will start to be cut from next year.
While Andrew Bailey, the governor of the Bank of England, has downplayed the prospect of imminent cuts, but many analysts are convinced there are no more hikes to come.
To choose one example, Capital Economics believes rates will stay at their current level for a year beofre falling to around 3% in 2025.
The markets are already pricing in cuts from 2024, and this expectation is playing into swap rates ‒ essentially what mortgage lenders pay for the money they borrow to fund their loans ‒ to the point that mortgage rates are dropping.
Of late, we have seen lenders like Halifax, HSBC, Yorkshire Building Society and Virgin Money dropping the rates on their two-year fixed-rate deals below 5%.
In total, there are now 27 lenders offering fixed rates at below 5%, compared with just 13 at the start of October, according to figures from financial data site Moneyfacts.
The alternative options
As a result mortgage borrowers face a more complicated decision.
The knowledge around what your mortgage will cost you each month will always appeal to plenty of borrowers, particularly at a time when household finances are under so much pressure.
After all, it’s far easier to budget if you know what your mortgage repayment will be, even if the cost of every other outgoing seems to be on the rise.
But the idea of locking in a rate for five years, when rates are likely to drop in 12 months or so, is less compelling.
That rate might seem like a winner today, but how will you feel a year or two down the line if you are paying hundreds of pounds a month more than if you’d waited it out?
Instead, it may be a case of opting for a shorter-term fixed-rate ‒ perhaps two years ‒ and then remortgaging to an even cheaper deal if rates move as expected.
Others may instead feel the time is right to go for a tracker rate.
Realistically Base Rate appears more likely to fall in the next couple of years, so signing up to a tracker could mean that over time you see the size of your repayments drop.
The fact that variable deals are usually cheaper initially than fixed rates makes the idea even more appealing.
A further plus point to these variable deals is that they often come without an exit fee.
As a result, if rates don’t drop as expected and you instead want to move to a fixed rate then you can change your mind without having to face a financial cost for doing so.
Where is my crystal ball?
It is worth emphasising that there’s no guarantee about what will happen next. While it looks likely that Base Rate increases have peaked, it’s still far from certain that rates for some time.
As the last few years have shown, events can swiftly emerge which change the course of where you’re headed.
Pandemics, wars, the fallout from Liz Truss' tax-cutting Budget ‒ all sorts of unexpected factors can pop up and impact what happens with mortgage rates.
Borrowers need to understand that, and their own attitude to risk, when hunting for a new mortgage.
How much risk, how much uncertainty are they willing to stomach with their next home loan?
Picking a mortgage is never an easy decision.
It’s the biggest borrowing any of us ever do, and so needs to be carefully considered.
But that decision has become much more complicated, with so many different routes available.
There’s no obvious right option either ‒ it all comes down to you as an individual and what best fits your own needs.