SVR mortgage rates soar – should you fix your mortgage?

Should you fix your mortgage? Standard variable rate mortgages are nearing highs not seen since 2008, and rates on fixed-term products are also rising.

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UK mortgage rates have risen significantly since their pandemic lows, but there are signs respite might be on the way for homeowners. 

Higher mortgage rates have contributed to the property market’s slowdown, seen house prices dropping and forced buyers to (re)consider if now is a good time to buy a house.

The latest data from Moneyfacts* shows the average 2-year fixed residential mortgage rate is 5.71%, while the average 5-year fixed rate is 5.31%. The average 2-year tracker rate is 6.14%, while the average standard variable mortgage rate is 8.18%, which is a massive 86% increase on the rate just three years ago (rate in December 2021, 4.40%)

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These are all far higher than the rates many locked in early 2022 and, as a result, millions of mortgage holders will see their repayments rise this year. But, there's a small chink of good news: most economists expect interest rates to fall this year, which could see mortgage rates fall also. 

In light of this context, should you fix your mortgage?

*Data correct at the time of writing.

Should I fix my mortgage?

The Bank of England’s base rate is currently 5.25%. The Bank of England has held it at this level for its past three meetings, following 14 consecutive hikes. 

Economists are expecting the BoE will cut rates at least twice over the next year as inflation falls closer to the Bank’s 2% target.

Borrowers who locked into a longer-term fixed mortgage before September 2022 (when rates spiked after Liz Truss and Kwasi Kwarteng's disastrous mini-Budget) will mostly be shielded from the impact that rate rises have had on the mortgage market.

But anyone whose fixed rates are expiring now will find themselves paying significantly more than they were before. 

If homeowners lock into a fixed rate now and rates fall over the next 12 months, they might be stuck paying over the odds for a long time. But the average SVR sitting at 8% might make a two-year fixed-rate mortgage look more appealing. 

The start of 2024 has also seen some encouraging mortgage rate cuts, says Sarah Coles, head of personal finance at Hargreaves Lansdown. “The average 2-year mortgage is now under 6%, and shopping around could get borrowers a deal of less than 4.5%,” she says. “Given that the average was knocking on the door of 7% back in August, this will come as a relief to those facing a remortgage or trying to get a deal for a new home.”

“Remortgagers are still likely to face a real nightmare because most of those on fixed rate deals will be swapping a rate of under 2% for one of over 4.5%, which is going to hurt,” Coles continues. “However, it may be better than they had been fearing, and for those with longer until their remortgage strikes, there’s the hope of more falls in the interim.”

The incentive to fix given the high SVR rate is clear – but make sure you have done your homework and shopped around. It may be worth considering shorter-term fixed-rate mortgages, given rates are expected to fall over the next year. Above all, borrowers would be wise to keep an eye on the property and mortgage markets for further developments.

How to reduce your mortgage repayments

There are a few things you can do to keep your monthly mortgage repayments down if you are worried about being able to afford your bills as interest rates rise.

1. Lengthening your mortgage term – is it a good idea?

One option, to reduce monthly payments, is to lengthen your mortgage term. Most people opt for a 25-year mortgage term when they first get a mortgage. But it is possible to get a mortgage of up to 40 years with some lenders. You can also lengthen your mortgage term when you remortgage. 

Lengthening your mortgage term can make a big difference to your monthly repayments.

An example: someone with a £200,000 mortgage at an interest rate of 2.75% would repay £922 a month over 25 years. If they lengthened their mortgage term to 35 years that repayment would drop to £742.

Just be aware though that by lengthening your mortgage you’ll pay significantly more interest over the life of the mortgage.  In the example above you'd pay £34,810 more, in interest. So only lengthen your mortgage term if you really need to.

2. Use savings to overpay your mortgage

Another way to cut your repayments is to use your savings to overpay your mortgage. Overpaying while you are still on a low-interest rate means you can make a big dent in the capital you owe. That means, when it is time to remortgage, the amount you need will be less and your new repayments will be lower.

Overpaying could also give you access to better interest rates if it reduces your loan-to-value (LTV) ratio (that is, the amount you need to borrow relative to the overall value of the house). 

The lower your LTV, the more deals you can access and at cheaper rates. So take a look at how much you would need to pay off to unlock those lower interest rates. You may find even a relatively small overpayment could make a huge difference.

An example: a borrower with a house worth £450,000 and a £275,000 mortgage has an LTV of 61.1%. If the borrower can pay just £7,000 off this debt, it would take the LTV below 60%.

In turn, this would mean they can get the best-buy five-year fix deal of 3.16% with monthly repayments of £1,293. Without the overpayment the best rate they could get would be 3.22% – that’s an extra £43 more a month. another benefit is that over the five-year term, they would save £2,074 in interest.

One thing to remember is that as savings rates have risen over the past two years, it's worth checking if you're better off putting your money into a high-yield savings account and then taking that to make an overpayment just before you need to remortgage. Use a mortgage overpayment calculator to compare the two options before you make your decision. 

3. Make sure your credit score is good

Before you apply for a new mortgage, take the time to check your credit rating. If there are any errors, contact the credit reference agencies to get them corrected. 

Also take steps to boost your credit score (for example, by joining the electoral roll if you’re not already on it). 

That way you maximise your chances of being approved for the best mortgage rates.

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.

With contributions from