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Mortgage rate cuts by UK banks and building societies have prompted borrowers to reconsider their home loan options, as they look to avoid locking into costly long-term deals in a shifting market.
In a sign of changing conditions in the mortgage sector, HSBC, Barclays, TSB and Nationwide — all top 10 UK lenders by size — made rate reductions this week. Other lenders to announce cuts in their range of deals included the Co-operative Bank, Skipton Building Society, MPowered, Pepper Money and Generation Home.
The moves are the first significant drop in mortgage rates by big lenders since May. They followed better than expected inflation data from the Bank of England last week, showing the consumer prices index fell to 7.9 per cent in the year to June, down from 8.7 per cent. As a result, markets predict the BoE will raise its official rate next week by a quarter-percentage point, rather than a half.
Not all lenders trimmed their rates, with Santander raising the costs of some of its deals. The average rate on a two-year fix on Friday was 6.81 per cent, down by just 0.02 percentage points since Monday, according to data provider Moneyfacts, while five-year fixes remained unchanged at 6.34 per cent.
But brokers said the suggestion that mortgage rates may have peaked was enough to cause borrowers to reassess their alternatives. When rates were rising sharply in June following disappointing news on inflation, they rushed to fix before lenders pushed costs even higher.
“Borrowers were saying ‘I don’t want to take a fixed rate but I’ve got no choice because I don’t know how bad it’s going to get’,” said Simon Gammon, managing partner at mortgage broker Knight Frank Finance.
As mortgage rates have started to come down, people are now shunning longer-term deals for fear they would lock in at a rate that might later prove expensive.
That meant borrowers were looking at two-year fixes — in spite of their higher costs compared with a five-year equivalent — or a tracker mortgage, which follows the BoE base rate. “We’ve seen a big shift away from five-year money,” said Mark Harris, chief executive at broker SPF Private Clients.
With tracker rates priced as low at 0.14 percentage points above base rate — currently 5 per cent — they are cheaper than average fixed-rate deals.
“Currently you can get a two-year fixed rate with Santander at 5.94 per cent in comparison to a two-year tracker at 5.14 per cent with Barclays,” Nick Mendes, manager at mortgage broker John Charcol, said this week.
Another attraction of trackers in an unpredictable market is that most waive any charges for borrowers seeking to leave the deal early. If fixed rates were to look more attractive in six months time, borrowers could move without incurring a penalty.
“It gives people options,” said Gammon. “The two main reasons for choosing a tracker right now is that if you believe that the markets are starting to show a downward trend, then you can follow that trend with your mortgage tracker product. And secondly, if you get it wrong or the market does not behave as you hope it will, then you have options without paying a charge.”
The tracker’s current price advantage is likely to persist for some time yet, in spite of the outlook for base rate rises. “Even though there are a couple of potential Bank of England base rate rises on the short term horizon, the tracker still looks cheap compared to the fixed rate,” said Gammon.
Some borrowers, such as first time buyers with tight finances, preferred a fixed rate, as it gave them certainty over the monthly outgoings. But wealthier or more sophisticated homeowners had other options, Harris said.
Bankers, lawyers and others in professions where bonuses made up a large proportion of overall pay were willing to take out interest-only loans, since these reduce monthly costs while allowing lump sum reductions.
Offset mortgages have also become more popular among well-paid borrowers, as interest rates have risen from the ultra-low era. Though offset rates are at a premium to standard residential mortgages, a lender will “offset” mortgage debt against deposits held by a borrower, reducing overall costs.
Harris said money held in anticipation of a future tax bill payment was a common reason for taking an offset. “If you’ve got fluctuating income and potentially a deferred tax situation where you can put money to work against your mortgage until your tax is due, an offset can start to look attractive.”
He added that while some of those with finance expertise might select a type of mortgage that underpinned their own view of the economic outlook, others would hedge against the unexpected with a product mix.
“If I’m borrowing £1mn, I can put some on a fix and some on a variable rate. It doesn’t have to have one product. It’s an alternative we do a lot of now,” he said.
Brokers warned that the medium term path of mortgage rates was unlikely to be smooth, or that they would fall as fast as they previously rose. Swap rates, which lenders use to guide their pricing of fixed rates — are affected by a range of forces and have been through a period of high volatility.
“Swaps came off quite a bit on the back of the positive inflation data, but have begun to creep up again this week,” said Harris. “The direction of travel is down, but it won’t be a straight line.”
