As fixed rates begin to fall, homeowners may be tempted to wait and see just how far they will drop before locking into their next deal.
Given how volatile the mortgage market has been over the last 12 months, experts say it’s a gamble.
But with forecasts from online property portal Zoopla suggesting that mortgage rates may sink below 5 per cent by the end of the year, it could be worth waiting for prices to come down before locking into your next deal — if, that is, your budget can withstand the initial shock.
Money Mail analysed the standard variable rates of top lenders to find out how much it would cost you in extra interest to remain on this rate for six months in the hope that fixed rates fall.
Mortgage rates briefly subsided in the spring, after spiking following last September’s mini-budget, which caused havoc in the economy.
Gamble: Forecasts from online property portal Zoopla sugges that mortgage rates may sink below 5% by the end of the year
After inflation failed to fall as quickly as expected, borrowing costs rose again — peaking at 6.86 per cent, according to Moneyfacts —surpassing the highs seen last year.
In recent weeks, banks have once again started to make small reductions to their fixed rates — news that will be welcomed by borrowers who will already be facing a steep rise in their monthly payment when they come to remortgage.
Throughout August, the average five-year fixed rate fell from 6.08 per cent to 5.72 per cent, while two-year deals have fallen from 6.61 per cent to 6.32 per cent, according to property website Rightmove.
But as fixed rates fall, the Bank of England has continued to hike the base rate, which immediately impacts the cost of variable rate mortgages.
Chris Sykes, technical director of mortgage broker Private Finance, says: ‘It’s a confusing time for borrowers, who may be wondering what will happen to rates next.
‘There are many decisions you can take that are right for your circumstances, but one approach you should not take is burying your head in the sand and hoping things get better.’
Money Mail analysed the standard variable rates of seven leading lenders to find out if, over a six-month period, it’s worth waiting before locking into a new fixed rate.
There are 773,000 homeowners on a standard variable rate — the rate a lender charges you when your deal ends and you don’t pick a new one or switch lenders — according to industry body UK Finance.
Standard variable rates are influenced by the Bank of England base rate. If it rises, your rate is likely to go up.
Lenders frequently contact customers up to six months before their mortgage deal expires, letting them know how to switch and what their lowest rates are.
Borrowers rolling off a fixed rate in the coming months, who have lots of equity in their homes, are likely to be saying farewell to a rate of 2 per cent or less. On a mortgage of £250,000 over 25 years, that is a monthly payment of £1,060.
Borrowers who jump straight onto a five-year fixed rate, which are currently cheaper than two-year deals, can expect to see their monthly payment rise to £1,535 on a rate of 5.5 per cent.
Those who decide to wait it out on their lender’s standard variable rate, hoping that prices will fall further, would see a steeper rise in borrowing costs initially, but could be rewarded in the long run.
Better deals: Throughout August, the average five-year fixed rate fell from 6.08% to 5.72%, while two-year deals have fallen from 6.61% to 6.32%, according to Rightmove
Take a Nationwide borrower, for example. They face a variable rate of 7.99 per cent after their fixed deal expires and, based on a loan of £250,000, would pay £1,927 a month.
If rates fell to 5 per cent six months from now, this would drop to £1,450 on a new five-year fixed rate. You will have spent £2,352 in extra interest instead of locking into a new deal straight away, but after 28 months it would pay off.
Barclays and Halifax homeowners face a rate of 8.74 per cent and monthly payments of £2,053. But after 37 months on a new five-year fix, they would have recouped their initial interest costs.
HSBC borrowers are in the best position. It would take them just 16 months to claw back extra interest paid while on the 6.99 per cent standard variable rate, costing £1,765 a month.
Santander and NatWest have set their standard variable rates at 8.50 per cent and 7.74 per cent, costing borrowers £2,013 and £1,886 a month respectively. Homeowners would need to wait between 25 to 35 months to break even.
Virgin Money’s borrowers face the longest wait. At a rate of 9.24 per cent, almost 4 percentage points higher than the Bank of England’s base rate, borrowers would pay £2,139 a month.
It would take 44 months to recoup the interest before their wait-and-see plan paid off.
While such a strategy could pay off in the long run, Sophie Waugh, mortgage technical director for brokerage John Charcol, says it’s a gamble. ‘If you decide to risk waiting on the standard variable rate, because it could work out cheaper in the end, you must factor the higher monthly payment into your budget.
Your monthly payment could go even higher if there’s another base-rate rise while you are waiting.’
The next meeting to decide on the direction of the base rate is later this month. If it does go up from 5.25 per cent, most standard variable rates will also rise.
The pricing of fixed rates is different. Rate setters look at what could happen in the future, and believe the base rate will eventually fall, which is why some fixed rates are falling now.
Richard Campo, founder of Rose Capital Partners, says there is a cheaper way to delay locking into your next fixed deal. ‘We’re dealing with lots of borrowers who want a penalty-free tracker, so if the Bank of England does start cutting rates next year, they can ride the interest rate wave down.’
A tracker mortgage follows the movements of the base rate, but by a margin above it.
HSBC, for example, is offering a tracker of 0.14 per cent above the base rate of 5.25 per cent to give a rate of 5.39 per cent, which is cheaper than a five-year fixed rate for a customer with a lot of equity. Barclays is offering a similar rate.
Even better, you’d only have to pay a fee of around £1,000 to move straight onto a tracker deal when your fix expires, which is equal to the cost of moving on to a new fixed rate.
With no early repayment charges, should fixed rates start to fall, or if the base rate rises too high for your budget, you can ditch the tracker and move to a fixed rate.
Mr Sykes adds: ‘Some homeowners need the security and peace of mind of locking into a fixed rate now, even knowing rates could fall. For them, taking a two or five-year fix straight away is the best decision.’
