Should you fix your mortgage or opt for a variable rate?
Mortgage rates have been soaring due to concerns about when the Bank of England will cut interest rates. So, should you fix?
UK mortgage rates have been climbing steadily since late-February. But should you fix?
Major lenders have been increasing their rates, particularly over the last fortnight, with mortgages now back where they were in January and still significantly above where they were pre-Covid. The only blessing for those staring down the barrel of current mortgage rates is that they are well below the record high seen in the summer of 2023.
The biggest reason why they are creeping upwards again is uncertainty over interest rates. Markets have been desperate to see the Bank of England announce cuts to the Bank Rate. We will find out what the central bank will do on 9 May.
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Should I fix my mortgage?
The Bank of England’s base rate is currently at 5.25%. It has been held at this 16-year high since August 2023, following 14 consecutive hikes.
Economists expect the central bank will cut rates from this summer onwards as inflation is expected to fall closer to the Bank’s 2% target. The latest statistics for April show the headline rate of price hikes was 3.2%.
However, inflation has been surprising the Bank of England throughout the cost of living crisis, so there can be no guarantee it will behave as the markets expect it to. Another set of data the Bank of England is looking at is average pay growth. Wages have been rising above the rate of inflation for several months now, which concerns the Bank as it fears it could increase inflation.
Why does this matter for mortgages? Well, swap rates (which are used to price mortgages) are partly influenced by where the Bank of England rate could sit in the future. Gilts also play a role in the pricing of these rates.
Given there has been uncertainty over when the Bank of England will reduce its rates, swap rates have been rising since February. So, mortgage rates have crept up too.
According to Moneyfacts, average fixed mortgage rates have climbed half a percentage point over the past two months to 5.93% on a two-year fix and 5.5% for a five-year deal (figures correct as of 3 May). Experts do not expect to see any downwards movement on these rates until the Bank of England cuts interest rates, which could mean we have to wait until June, or even August, before mortgages get cheaper.
Even then, we may not see much movement warns Sarah Coles, head of personal finance at Hargreaves Lansdown. She says: "If the Bank holds rates and issues a statement saying it’s in no rush to cut them, we may get very little reaction. It’s only if we get hints at potential earlier cuts that we could see some better deals emerge.
"In fact, if the cuts come in the autumn, we may not get dramatic changes to mortgage rates even then. Variable rates will fall, but with only two or three cuts expected by the end of the year, they’re unlikely to move far. Fixed rates, meanwhile, may remain unmoved until we have signs that inflation has worked its way out of the system and rates are set to go significantly lower in the foreseeable future."
If you're among the 1.5 million households on cheap rates whose mortgage deal will expire in 2024, you may be wondering whether you should fix. So, let's look at the alternative products and how their rates compare.
Standard variable rates (the products you fall onto when your fix expires) are currently significantly more expensive than fixed deals. Moneyfacts says the average SVR comes with a rate of 8.18%. Meanwhile, tracker mortgages (which rise and fall depending on the Bank Rate) are also priced higher at 6.12%.
The benefit of both products is that you can break out of them fairly easily and switch to a cheaper fix. However, their rates mean you may be better off going for a short-term fixed deal and paying over the odds for a year or so when mortgage rates do fall. Those who are around six months away from their current fix's expiry date can lock in a fix now and hop to another one if rates get cheaper.
So, what should you do? We advise speaking to a mortgage adviser. They can look at your circumstances and work out what will suit you best.
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 4.14%. Without the overpayment the best rate they could be 4.34%, which would see them pay significantly more in interest over the term of that mortgage deal.
One thing to remember is that as savings rates have risen considerably over the past two years, so 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.
It's also worth noting that applying for extra current accounts to take advantage of switcher offers can impact your credit score too. So, it's safest to avoid going for such deals when you're close to remortgaging.
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Henry Sandercock has spent more than eight years as a journalist covering a wide variety of beats. Having studied for an MA in journalism at the University of Kent, he started his career in the garden of England as a reporter for local TV channel KMTV.
Henry then worked at the BBC for three years as a radio producer - mostly on BBC Radio 2 with Jeremy Vine, but also on major BBC Radio 4 programmes like The World at One, PM and Broadcasting House. Switching to print media, he covered fresh foods for respected magazine The Grocer for two years.
After moving to NationalWorld.com - a national news site run by the publisher of The Scotsman and Yorkshire Post - Henry began reporting on the cost of living crisis, becoming the title’s money editor in early 2023. He covered everything from the energy crisis to scams, and inflation. You will now find him writing for MoneyWeek. Away from work, Henry lives in Edinburgh with his partner and their whippet Whisper.
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