Mortgage holders hit by high borrowing costs may finally see light at the end of the tunnel after lenders cut rates last week.
The Bank of England’s cut of the base rate to 5% has triggered a new round of cuts by major mortgage lenders and offers fresh hope to the 700,000 homeowners whose fixed-rate contracts expire in the second half of the year.
But will interest rates fall quickly enough to make a real difference to your monthly payments? And if you’re nearing the end of your term, should you wait for further reductions?
What’s happening with mortgage rates?
Homeowners have been faced with high borrowing costs as rising interest rates have added hundreds of pounds to monthly payments. But we appear to have reached a tipping point. Within hours of the Bank of England cutting the base rate, major lenders including Santander and Coventry Building Society repriced variable and floating rate mortgages by 0.25 percentage points from September, while Barclays cut its variable rates.
Fixed-rate deals fell ahead of the cut as lenders lowered offer prices in anticipation.
Ranald Mitchell of Charwin Mortgages expects the pace of rate cuts to accelerate in the coming weeks. He says: “Mortgage lenders are starting to cut rates.”
But with the Bank’s cut coming sooner than many had expected, lenders are likely to cut rates further, according to David Hollingworth of brokers L&C. Building societies in Skipton, Leeds and Yorkshire have announced further cuts, as has NatWest.
The average two-year fixed residential mortgage rate was 5.76 per cent on Friday, while the average five-year fixed rate stood at 5.37 per cent, rate checkers Moneyfactscompare say.
This figure represents a decrease from 5.97 percent on June 28 for the average two-year fixed-term, while five-year agreements were at 5.55 percent.
Should you fix it? now Or keep the fire going?
Fixed rate deals are likely to continue to improve. Ranald Mitchell of Charwin Mortgages expects the pace of cuts to accelerate in the coming weeks. He says: “Mortgage lenders are starting to cut rates.”
Markets are anticipating a further cut by the Bank of England before the end of the year.
According to brokers, the best rates could be nearly two percentage points lower than the current average by early 2025. Nicholas Mendes, an agent at John Charcol, says borrowers with a 60 percent loan-to-value ratio should be able to get a five-year fixed rate as low as 3.5 percent by early 2025. Mortgage holders with an 80 percent loan-to-value ratio could see rates around 4 percent.
But what if you need to refinance your mortgage now?
Variable rate mortgages have been the ones that have benefited most immediately from the Bank’s rate cuts, as they are directly linked to the base interest rate.
Borrowers with a variable rate mortgage are expected to see their bills cut by an average of £336 a year, according to banking trade body UK Finance.
It can be tempting to take out a variable-rate mortgage and wait for fixed rates to fall further, but this strategy could prove costly, as variable-rate mortgages are expensive, says Justin Moy of EHF Mortgages. He says there is typically a difference of between 0.5 and 1 percentage point between two-year variable-rate mortgages and two-year ARMs, with variable-rate mortgages being the higher of the two.
It can be tempting to take out a variable rate mortgage and wait for fixed rates to fall further, but this strategy could prove costly as variable rate mortgages are expensive, says Justin Moy of EHF Mortgages.
Borrowers would therefore need another two to four base rate cuts for variable-rate agreements to match current fixed-rate products.
Mr Moy says: ‘Variable rate mortgages are expensive, so taking one out simply to save money will be hard to justify.’
He says people can get a better deal through their lender. Some banks and building societies even offer a “track and switch” product so homeowners can agree to a tracker deal and then switch if rates come down in 2025.
For homeowners who value the certainty of their monthly payments, fixed-term agreements tend to be a good option, says Craig Fish of Lodestone Mortgages. Continuing with a standard variable rate (SVR) to wait for further rate cuts could also prove costly.
According to Moneyfactscompare, the average SVR was 8.16 percent on August 1.
Even if fixed rates were to fall by 0.5 percentage points over the next six months, you may still be worse off waiting. A homeowner with a 25-year, £150,000 mortgage with a variable yield of 8.49 per cent for six months who then chooses a product with a fixed rate of 4.35 per cent in six months’ time would spend £22,098 on their home loan over two years, according to brokerage firm L&C.
The same borrower who opted for a two-year fixed rate of 4.85 per cent now would pay £20,732 over two years, or £1,366 less. This is assuming the standard rate of return does not fall.
How long should you block?
Borrowers who want more certainty about monthly payments tend to stay with the loan for longer, says Ben Perks of Orchard Financial Advisers.
‘Some borrowers are forced to act on new affordability calculations that give them more money if they set their repayment term over a longer period.’
He’s seen an increase in those taking out higher, short-term fixed-rate loans in the hopes of getting a better rate in a couple of years.
Choose a broker who will review your options until the refinance is complete.
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