More than half of all fixed-rate mortgages coming up for renewal this year has been fixed at interest rates below two percent. Today, borrowers face paying around six percent, as the Bank of England repeatedly hikes base rates.
This will cost them an extra £2,900 a year on average, or £242 a month according to think tank The Resolution Foundation. One in three face paying an extra £1,000 a month and risk losing their homes as a result.
When their mortgage comes up for renewal, they have to get it right.
The mortgage crunch is adding fresh intensity to the old question of whether it is better to fix the interest rate on a home loan or opt for a variable or tracker rate instead.
For the last decade, nine in 10 borrowers have gone for a fix as this allowed them to lock into ultra-low interest rates, typically for two to five years.
They won’t find any two percent deals today.
The average two-year fixed-rate mortgage now charges 6.84 percent, according to data provider Moneyfacts.
Five-year fixes are actually slightly cheaper at 6.35 percent. This reflects the fact that markets expect interest rates to start falling in a year or two.
Traditionally, long-term fixed-rate mortgages offer protection, but locking into one now could backfire.
It could involve paying today’s elevated interest rates all the way through to 2028. That will be agony if mortgage rates start falling, which is likely towards the end of last year.
Yet the decision isn’t easy as the BoE hasn’t finished hiking rates yet.
Last week, its rate-setting monetary policy committee (MPC) increased base rates for the 14th meeting in a row to 5.25 percent.
Markets expect another hike at its September meeting, and possibly one more in November, which would lift base rates to 5.75 percent. Some reckon rates could peak at six percent in December.
This could pile yet more costs onto remortgaging homeowners, said David Hollingworth, associate director at brokers L&C Mortgages.
Taking out a two-year fixed rate today offers some protection and this is now the mortgage of choice. “Our customers have mostly been opting to fix for two years even though rates are higher than five-year fixes, in the hope that they can remortgage at much lower rates when their deal ends in 2025,” Hollingworth said.
Second-guessing interest rate movements is risky, though. Those who expect inflation and interest rates to stay high for years might still prefer a five-year fix.
However, they will typically have to pay early redemption charges if they switch to a cheaper deal during their term. These typically start at five percent of the loan in year one, then decline every year.
Now another mortgage option is coming back into play.
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Borrowers have largely abandoned discounted variable rate and base rate tracker mortgages but they should reconsider, Hollingworth said.
“Variable rates have been edging up in the popularity stakes as they could end up being cheaper once interest rates start to come back down.”
Nobody can say for sure when that will happen, but market consensus is that the process could begin in the second half of 2024.
The downside is that the interest rate could increase in the short term if the BoE keeps hiking, Hollingworth added. “Consider if you could afford that and do a personal mortgage ‘stress test’ using an online calculator.”
Your decision will also rest on when your mortgage expires and what deals are available then. For example, two and five-year fixed rates may fall in anticipation of future base rate cuts, even before the MPC acts.
Whatever your situation, shop around. It is possible to get a two year fixed rate from 5.86 percent or a five-year fix starting at 5.20 percent, according to Moneyfacts. Those borrowing at lower loan-to-values are best placed, as they present less risk to the bank.
Discounted variable rates start at around 4.74 percent. So shop around and consider talking to a mortgage broker to find the right deal for you. Faced with such a complex decision, homeowners need all the help they can get.
