Homeowners who are coming to the end of their current mortgage deals may be wondering whether to lock into a fixed rate now, or wait in the hope that cheaper deals might become available.
The Bank of England’s base rate stands at 5.25%. The average five year fixed rate currently stands at 5.91% while the average two year fixed rate is 6.36%. Inflation numbers remained at 6.7% in the 12 months to September for the second month in a row, and while stubborn inflation doesn’t necessarily mean borrowers should brace for further rate hikes, it could mean that rates remain higher for longer.
Higher rates leave thousands of homeowners facing the dilemma of whether to lock in now or wait in the hope that rates may fall in the not too distant future.
Here, we explain how much a fixed rate deal at current rates is likely to cost you, compared to choosing a cheaper variable rate mortgage – and look at some of the risks of both variable and fixed deals during these economically uncertain times.
Is now a good time to fix my mortgage?
The main reason many homeowners prefer fixed rate mortgages over variable rate deals is the valuable peace of mind they provide that mortgage payments will be the same every month.
However, the best buy fixed rates are now a little cheaper than variable mortgage rates, so if you do want the security that your payments won’t change regardless of what happens to interest rates, you might be better off choosing one of these deals.
For example, the cheapest two-year fixed rate mortgage at the time of writing was 5.19%, whereas the cheapest two-year variable rate was a discounted deal at 5.29%. Discounted mortgage deals, as the name suggests, offer a discount off the lender’s standard variable rate (SVR). A discounted mortgage is a variable rate deal because the SVR can move in line with interest rates – or when the lender decides.
Someone with a £150,000 repayment mortgage with 15 years left to run would pay £1,204 a month on the 5.19% fixed rate, but £1,201 a month on the 5.29% discounted rate – a small saving of £96 over a year.
Teddy Cenaj, mortgages expert at Rest Less Mortgages, said: “With the economic outlook remaining uncertain, a fixed rate will give you that stability of knowing exactly what your monthly payment is, alongside being slightly cheaper than a variable deal at the moment.”
How long should I fix my mortgage for?
It’s worth noting that longer term fixed rate mortgages are currently lower than two year fixed rates. At the time of writing, it was possible to find a 10-year fixed rate at 5.04% and a five-year fixed rate at 4.85%, although these deals are only available to those with a deposit of at least 40%, or the equivalent amount of equity if remortgaging.
If you’re considering locking in to a fixed rate for several years, bear in mind that although most long-term fixed-rate mortgages are portable, so you can take them with you if you move home, you will need to effectively re-apply for the mortgage if you want to do this. Many lenders are tightening up their affordability checks given rising living costs, so there’s a risk you might not be able to move your mortgage across to a new property in the future, especially if your circumstances have changed. Find out more about this in our guide Is it getting harder to get a mortgage?
It’s also important to remember that if you are planning a move and you need additional borrowing, this will usually have to be arranged at a different rate to your existing mortgage, so you effectively end up with two mortgages on the same property. Learn more about this in our article Moving house with a mortgage – what you need to know.
What should I do with my mortgage if I wait?
If you’re currently on your lender’s standard variable rate, or revert rate, or are about to move onto it when your current deal ends then you should be able to save by moving onto either a discounted or tracker rate mortgage, if you want to wait and see what happens to fixed rates. However, if you were previously locked into a very low fixed rate deal, you’re likely to still see a sharp rise in your monthly payments, even if you find a competitive variable rate deal.
Remember however, that if you do opt for a tracker rate, things could change quickly and you could see your mortgage payments shoot up if the Bank of England continues to raise rates. For example, if the base rate were to rise from 5.25% to 6% by July 2024, and you’d signed up for a two-year tracker at base rate plus 0.20%, your monthly payments (assuming the same £150,000 repayment mortgage over 15 years) would jump from £1,222 today to £1,282 by next summer. This would cost you £81 a month more from that point than if you’d signed up to the cheapest 5.19% two-year fixed rate.
It’s impossible for anyone to know what the future holds, so the decision whether you should fix your mortgage now or wait really depends on what you personally think is going to happen to rates in coming months, and whether you need the absolute budgeting certainty that a fixed rate provides or not.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.
How to reduce mortgage costs
Many people are worried about how they will manage steeper mortgage payments when their current mortgage deal ends, so it’s worth thinking about how you’ll cope, and whether there are any steps you can take now to try to minimise the impact of higher rates.
If you’re lucky enough to have savings available, you may want to consider making mortgage overpayments, so that you can reduce the amount you owe more quickly. Most lenders will allow you to repay up to 10% of your mortgage balance each year without penalty, but always check the terms of your particular deal first before you start overpaying.
Rob Morgan, chief investment analyst at Charles Stanley, said: “If inflation and interest rates stay high over the medium to longer term, then reducing debt is likely to be wise. However, it is also possible rates could come down quite sharply and the cost of mortgage debt returned to the low levels we have experienced for the past decade or so.
“If you do decide to pay down or pay off a mortgage you must consider any penalties for doing so. Early-repayment charges (ERCs) often apply during any fixed or discounted period and are usually calculated as a percentage of the amount you repay. Often, these are tiered and fall away over time. Depending on circumstances, it can be worth paying an ERC as the interest saving could be more than the fee incurred.”
If you don’t have savings available to reduce your mortgage, and know you won’t be able to afford higher mortgage costs when your current deal ends, talk to your lender as soon as possible, and start thinking about ways you might be able to reduce your monthly payments. For example, if you’re a homeowner who is over 55, it may be worth seeking advice on retirement interest-only mortgages. These enable you to only pay the interest on your mortgage amount indefinitely. You don’t have to worry about repaying the capital loan, which is only repaid when you die or move.
Find out more about some of the options that might be available to you in our guide What can you do if you can’t pay your mortgage?