Mortgage rates creep up – when to ditch your tracker for a fixed deal
After a tumultuous 2023, mortgage borrowers may be relieved to know inflation is on the way down, and the Bank Rate seems to have peaked.
That being said, the Bank Rate has been held at its peak of 5.25pc since August 2023 – and, thanks to the most recent results of the Bank of England’s Monetary Policy Committee meeting – it will continue to be held until at least May 9, when the next rates decision will be announced.
The Consumer Prices Index (CPI) measure of inflation was 3.2pc in March, down from 3.4pc in February, according to the Office for National Statistics.
Huge numbers of home owners have been waiting on “tracker” mortgages for the past two years, hoping for fixed deals to come down before securing their home loans.
With the cheapest fixed deals now below the 5.25pc Bank Rate, anyone currently on a tracker may be wondering if it’s time to switch.
Is it a bad time to fix?
Fixed-rate deals have been getting cheaper in recent months, but average rates have crept up slightly in the past couple of months. The cheapest fixed deals can undercut tracker rates, but some people may find they’re offered similar rates for both types of mortgages.
The cheapest two-year fixed-rate mortgage available in all areas of the UK is now 4.55pc, offered by Lloyds Bank, according to Moneyfacts, an analyst. It has a product fee of £999. Fix for five years, and the cheapest rate available is 4.18pc, from NatWest, which comes with a £1,495 fee.
However, despite fixed-rate deals getting cheaper, tracker mortgages could still be the right choice for some people – with recent predictions suggesting that those with tracker mortgages could be saving £300 a month by the end of the year once the Bank Rate starts to fall.
“I would suggest a tracker would still make sense for a lot of people as the Bank Rate is likely to reduce in the next two years. However, some tracker rates are 1pc higher than a two-year fix. In this scenario it is more risky to get a tracker as we are unsure when rates will come down and by how much,” said Ashley Thomas, director at Magni Finance, a London-based mortgage broker.
“It depends on the situation, whether you have plans to move, and how much risk you are willing to take.”
Justin Moy, managing director EHF Mortgages, agrees that the “best” deal depends on your attitude for risk: “A nervous borrower who does have concerns about fluctuating rates, and cannot cope with potential increases, will normally be better with a fixed deal, possibly short-term,” he said.
“Both sets of rates are reasonably similar at the moment, so the initial monthly payments should not be a definitive guide to the direction to take. Most trackers products have some form of ‘switch and fix’ option, allowing a borrower to change back to a fixed [mortgage] when they feel comfortable to do so without a penalty, or if rates start showing signs of increase.”
That said, if the Bank of England continues to hold the Bank Rate and fixed rates drop, those with tracker mortgages could find they’re paying over the odds.
It is important to remember that the lowest interest rates do not necessarily equate to the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
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How long should I fix for?
The cost of borrowing this year will remain inflated, serving as a shock for households coming off rates fixed two or five years ago. More than 1.4 million borrowers will pay higher rates this year as their fixed deal comes to an end, according to figures published by the Office for National Statistics.
Thanks to promising inflation figures over the past few months, the Bank Rate is not expected to rise any further, and hopefully will soon start to fall.
David Hollingworth of L&C Mortgages said:
“The fall in the rate of inflation to 3.2pc is another welcome step forward, despite being slightly higher than some had forecast. Nonetheless it’s a step in the right direction towards the point when the Bank of England may begin to ease interest rates back.
“With a larger fall expected next month some may be hoping a cut will come sooner rather than later. However, the Bank is likely to take the threat of inflation remaining higher for longer seriously and has repeatedly suggested it won’t act until it’s sure that inflation is under control.
“Market expectation will be important in determining fixed rate pricing. Fixed rates have fallen substantially since last summer, but have largely stabilised. With uncertainty still in the air as to how quickly the Bank Rate may fall, those holding out for further cuts may find themselves in for a long wait.
The better approach could be to secure a rate now and keep a close review of movements before completion. A move to a better rate can still be made, but a rate is already in place if things take a turn and rates edge higher.”
Should I lock in a new deal early?
If you need to remortgage in the next three to six months, it may be possible to secure a new mortgage deal early, which will still be valid by the time you need to actually make the switch.
Locking in a new deal now – whether it’s for a tracker or a fixed-rate – may shield you in case of any further rate rises. After all, if the past couple of years have taught us anything, it’s that the mortgage market can turn in a very short period of time.
Having a new mortgage lined up ahead of time will also save you from spending any time on your lender’s standard variable rate (SVR), which will almost certainly charge far more interest than any fixed or tracker options.
Mr Hollingworth said: “Once an application is made a deal will be secured and that could be done up to six months before the end of the current deal.
“That will mean that borrowers are protected against any further rises in fixed rates, but they can still change to a new deal if rates improve in the meantime.”
It’s a good idea to speak to a mortgage broker to assess your options before making any firm decisions.
If you’re concerned about whether your budget will be able to stretch to higher mortgage costs, talk to your lender.
Sam Richardson, deputy editor of Which? Money, said: “Mortgage lenders are obliged to offer support to their customers, so those struggling to meet mortgage payments should speak to their lender about what help is available. Doing so will not affect your credit rating. Further support may come in the form of temporary break from payments, interest-only repayments or extending the term of the mortgage.”
