While the mortgage market has calmed down significantly compared to the volatility seen last year, it’s not guaranteed that rates will continue to fall – some lenders, in fact, have increased rates a little since the start of the year.
This is due to the expectation that the Bank of England might hold the Bank Rate at its current level of 5.25pc – where it’s been since August 2023 – for longer than first thought.
Inflation is another factor that can affect interest rates. The Consumer Prices Index (CPI) measure of inflation rose by 3.2pc in March, down from 3.4pc in February, according to the latest figures from the Office for National Statistics.
Despite the fall, it was not enough to budge the Bank Rate, which was held once again at the most recent Monetary Policy Committee meeting. The results of the next meeting are due to be announced on May 9.
More than 1.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2024, with many being forced to refinance at rates that are double what they are used to.
January was a busy period for remortgagers as 192,000 fixed deals expire – the most of any month in the past year, according to FCA data. We have now entered another pinch point, as 420,00 deals are due to end between March and May.
While rates have seen some significant reductions in fixed rates over recent weeks, remortgaging will result in a huge jump for those who’d taken out a two-year deal in 2021, when average rates were well below 3pc.
Where are mortgage rates now?
The average two-year fixed rate is currently 5.81pc; the average five-year fix is priced slightly cheaper at 5.39pc, according to analyst Moneyfacts.
One decision lots of homeowners have been struggling with is whether to commit to a fixed-rate deal, or opt for a tracker mortgage that’s linked to the Bank Rate. Should interest rates reduce, those with tracker mortgages will see their mortgage bills get cheaper – until then, you might find yourself on a deal that’s more expensive than the cheapest fixed deals.
Our guide on the fixed rate vs tracker dilemma can help.
Will mortgage rates rise if the Bank Rate increases again?
The Bank of England made 14 consecutive raises to its central interest rate, known as the Bank Rate, since December 2021 – a trend which has finally ended, as it’s held the Bank Rate at 5.25pc since August 2023. The Bank’s next Rate decision will be announced on May 9 2024.
Throughout the last year lenders passed on the majority of Bank Rate increases to mortgage customers as their own borrowing costs rose. Now it’s no longer rising, other market factors such as swap rates are impacting mortgage rates.
Where can I find the cheapest interest rates?
The cheapest two-year fixed-rate mortgage available across the UK for someone remortgaging is now 4.55pc, offered by Lloyds Bank, according to Moneyfacts. It is available for buyers with a 40pc deposit or equity, and has a product fee of £999.
Fix for five years, and the cheapest rate available is 4.18pc, from NatWest, again for those with 40pc equity. It has a product fee of £1,495.
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.
Lenders commonly set fees between £899 and £1,999, but some use percentages instead, such as 0.5pc of the overall loan amount.
Adrian Anderson, of broker Anderson Harris, said: “Don’t just look at the headline rate. Consider the overall cost of the deal, including any fees and whether the lender will pay for a mortgage valuation and legal conveyance, which most banks do.”
If you are locking in for longer than two years then be sure to check any repayment penalties which would apply should your circumstances change and you need to exit the deal early – these can run into the thousands of pounds.
How long should I lock in a rate for?
Thousands of today’s homeowners with fixed mortgages are on rates agreed before the Bank Rate started to increase in December 2021. This means they are likely to face a steep increase in their payments when they reach the end of their current deal and take out a new loan.
This is because while fixed rates may be falling, the cost of borrowing is still inflated when compared with mortgages which were locked in two or five years ago. Borrowers coming off those deals and searching for a new rate are very likely to face higher rates. Bank of England data – released in December – shows around 500,000 households will suffer monthly mortgage bill hikes of more than £500 in 2024.
Rather than opting for five or 10-year deals, brokers are suggesting a typical borrower should fix for two years as this would minimise the amount of time spent fixed on an inflated rate. However, the current pricing of longer term deals are certainly encouraging many borrowers to think again.
Mortgage rates are predicted to have fallen by 2026, when homeowners will be able to make the most of cheaper repayments. However, the market has proved to be unpredictable, and how long each household fixes will depend on their individual financial circumstances.
How far will mortgage rates drop?
For those needing to remortgage this year, or early in 2025, they might need to prepare for a higher mortgage rate than they had perhaps hoped for.
Nicholas Mendes of broker John Charcol says: “Mortgage rates haven’t fallen as quickly as many anticipated following the early-year enthusiasm among lenders. While mortgage rates have declined from last year’s highs, many mortgage holders undoubtedly hoped for a more substantial reduction by now.
“The Bank of England is looking for signs that services inflation has weakened before it decides when it can start lowering UK interest rates from their current 16-year high.
“Financial markets are pricing in the first bank rate reduction in June, though there is an underlying concern that the MPC will wait for the Fed to make their move first. This is expected to happen in August, if not later, which could be disastrous for mortgage holders who may have to endure higher rates for longer than many deem necessary.
“Mortgage holders coming to the end of their fixed deals this year and in early 2025 will need to be prepared to see rates higher than early predictions. Initial forecasts of a 3.5pc fixed rate by August to late September are very unlikely, with any sign of such a deal now pushed back to later in the year.”
How can I get the best rate for my mortgage?
Borrowers who put more equity into a property make themselves less risky customers, increasing the chances a lender will be happier to offer them lower interest rates.
Banks use the term “loan-to-value ratio” (LTV) to label how much they lend a borrower against a home. For example, a £160,000 mortgage on a £200,000 home would be a loan-to-value of 80pc.
A lower loan-to-value and bigger deposit will usually unlock lower interest rates. Mr Anderson said: “It can make quite a big difference to the amount of interest you pay over the term of the deal.
“So if you have cash available you may want to consider paying down part of the mortgage to access a better rate.”
Our mortgage overpayment calculator can help you weigh up whether you’re better off overpaying your mortgage, or putting your extra cash into a savings account.
Households with a significant cash pile could also access lower rates by using an offset mortgage. A handful of banks allow borrowers to reduce the cost of their loan using cash held in an account with the same lender.
For example, a customer borrowing a £500,000 mortgage and with £200,000 in savings would only pay interest on £300,000 of the loan, but will forfeit any interest on the cash pot.
Based on a mortgage interest rate of 4.5pc, this would reduce monthly interest from £1,873 a month to £1,124 – a saving of £749 each month.
Mr Anderson said: “Offset mortgages are proving especially popular as tax thresholds are shrinking and reducing households’ personal allowance.
“There should be no tax to pay on savings used to offset the mortgage balance and you should not be paying interest on the mortgage balance offset by the cash funds. The account should also be instant access so you still have access to liquidity if circumstances change.”
Borrowers opting for a more specialist mortgage, such as an offset deal, should consult a mortgage adviser. The market is changing rapidly and with savings rates also on the rise, independent advice could save a lot of money.
What about interest-only mortgages?
Any homeowners struggling to pay their mortgage bills are able to switch to interest-only deals without a formal repayment plan. City watchdog, the Financial Conduct Authority, announced the change last year in a bid to help lenders provide mortgage forbearance at scale.
However, once the temporary interest-free period is over, homeowners must make up their repayments. To switch to a permanent interest-only deal, you’ll still need a credible repayment plan.
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