As fixed rates begin to drop, homeowners may be tempted to wait and see how far they will drop before closing on their next deal.
Given how volatile the mortgage market has been over the past 12 months, experts say that’s a gamble.
But with forecasts from online real estate portal Zoopla suggesting mortgage rates may fall below 5 percent by the end of the year, it might be worth waiting for prices to drop before closing on your next deal—that is, if your budget can withstand the initial shock.
Money Mail looked at the standard variable rates from major lenders to find out how much it would cost you in additional interest to stay at this rate for six months in the hope that fixed rates will drop.
Mortgage rates fell briefly in the spring, after skyrocketing after last September’s mini-budget, which wreaked havoc on the economy.
Bet: Forecasts from the online real estate portal Zoopla suggest that mortgage rates may fall below 5% by the end of the year
After inflation did not come down as quickly as expected, borrowing costs rose again (peaking at 6.86 percent, according to Moneyfacts), surpassing the highs seen last year.
In recent weeks, banks have once again begun making small reductions in their fixed rates, news that will be welcomed by borrowers who will already face a sharp increase in their monthly payment when they come to remortgage.
Through August, the average five-year fixed rate fell from 6.08 percent to 5.72 percent, while two-year offers fell from 6.61 percent to 6.32 percent, according to the Rightmove real estate website.
But as fixed rates fall, the Bank of England has continued to raise the base rate, which immediately impacts the cost of variable rate mortgages.
Chris Sykes, chief technical officer at mortgage brokerage Private Finance, says: “It’s a confusing time for borrowers, who may be wondering what will happen next with rates.”
“There are many decisions you can make that are appropriate for your circumstances, but one approach you shouldn’t take is to bury your head in the sand and hope things get better.”
Money Mail looked at standard variable rates from seven leading lenders to find out if, over a six-month period, it’s worth waiting before locking in a new fixed rate.
There are 773,000 homeowners with a standard variable rate (the rate a lender charges you when your deal ends and you don’t choose a new one or change lenders), according to industry body UK Finance.
Standard floating rates are influenced by the Bank of England base rate. If it goes up, your rate is likely to go up.
Lenders often contact customers up to six months before their mortgage contract expires, telling them how to switch and what their lower rates are.
Borrowers who leave a fixed rate in the coming months and who have a lot of equity in their homes are likely to say goodbye to a rate of 2 percent or less. On a £250,000 mortgage over 25 years, that’s a £1,060 monthly payment.
Borrowers who opt outright for a five-year fixed rate, which is currently cheaper than two-year deals, can expect their monthly payment to rise to £1,535 at a rate of 5.5 per cent.
Those who decide to hold out with their lender’s standard variable rate, hoping to see prices fall further, would initially see a steeper rise in borrowing costs, but could be rewarded in the long run.
Best Deals: Through August, the average five-year fixed rate fell from 6.08% to 5.72%, while two-year deals fell from 6.61% to 6.32%, according to Rightmove.
Let’s take a Nationwide borrower as an example. They face a variable rate of 7.99 per cent after their fixed deal expires and, based on a £250,000 loan, they would pay £1,927 a month.
If rates fell to 5 per cent six months from now, this would drop to £1,450 at a new five-year fixed rate. You will have spent £2,352 in additional interest rather than closing a new deal straight away, but after 28 months, it will have been worth it.
Barclays and Halifax homeowners face a rate of 8.74 percent and monthly payments of £2,053. But after 37 months with a new five-year solution, they would have recouped their initial interest costs.
HSBC borrowers are in the best position. It would take them just 16 months to recoup the extra interest paid while applying the standard variable rate of 6.99 per cent, which costs £1,765 a month.
Santander and NatWest have set their standard variable rates at 8.50 percent and 7.74 percent, costing borrowers £2,013 and £1,886 a month respectively. Homeowners would have to wait 25-35 months to break even.
Virgin Money borrowers face the longest wait. At a rate of 9.24 percent, almost 4 percentage points higher than the Bank of England base rate, borrowers would pay £2,139 a month.
It would take 44 months to recoup the interest before his wait-and-see plan would pay off.
While such a strategy could pay off in the long run, Sophie Waugh, mortgage technical director at brokerage John Charcol, says it’s a gamble. ‘If you decide to risk waiting for the standard variable rate, because it might turn out cheaper in the end, you should factor the higher monthly payment into your budget.
Your monthly payment could be even higher if there is another base rate increase while you wait.’
The next meeting to decide the direction of the base rate will be later this month. If it goes up from 5.25 percent, most standard variable rates will also go up.
The price of fixed rates is different. Rate setters look at what might happen in the future and believe that the base rate will eventually fall, which is why some fixed rates are falling now.
Richard Campo, founder of Rose Capital Partners, says there’s a cheaper way to delay the closing of your next fixed deal. “We’re dealing with a lot of borrowers who want a penalty-free tracker, so if the Bank of England starts cutting rates next year, they can ride the wave of lower interest rates.”
A tracking mortgage follows the movements of the base rate, but by a margin above it.
HSBC, for example, offers a tracking rate of 0.14 percent on top of the base rate of 5.25 percent to give a rate of 5.39 percent, which is cheaper than a five-year fixed rate. for a client with a lot of capital. Barclays offers a similar rate.
Even better, you’d only need to pay a fee of around £1,000 to move directly to a follow-on agreement when your solution expires, which is equal to the cost of moving to a new fixed fee.
With no prepayment fees, if fixed rates start to drop or the base rate gets too high for your budget, you can ditch the tracker and move to a fixed rate.
Sykes adds: ‘Some homeowners need the security and peace of mind of locking in a fixed interest rate now, even knowing that rates could go down. For them, taking an immediate solution of two or five years is the best decision.’
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.