There have been a slew of mortgage rate cuts in recent weeks ahead of next week’s interest rate decision from the Bank of England.
HSBC is the latest lender to announce it is cutting rates tomorrow, joining Santander, TSB, Virgin Money, and Co-operative Bank which have all dropped borrowing rates recently.
With the Bank set to announce its latest review of the base rate next Thursday, a decision that could have a knock-on effect for mortgage rates, homeowners may be wondering whether now is a good time to fix their mortgage deal.
i spoke to brokers to find out whether now is the time to act – or if you could be better off holding off until after the Bank’s decision.
How does the base rate impact mortgage rates?
Generally speaking, mortgages are either fixed – where your rate is set for a period of time, or they are variable – which means your rate changes from time to time.
A variable rate includes tracker mortgages and standard variable rate (SVR) mortgages. If you have a variable mortgage, a mortgage lender can set their own variable rate. However, a tracker mortgage normally follows the Bank of England’s base rate.
This rate, decided by the Bank’s Monetary Policy Committee (MPC), influences borrowing costs. It was at a historic low of 0.1 per cent in December 2021, when mortgage rates could be found for as little as 1 per cent, but is now at 5.25 per cent.
This means those on variable rates have seen their bills jump significantly. And while those on fixed rates won’t be immediately affected by an interest rate change, they will in the future when looking to get a new deal.
Looking ahead to next week’s decision, economists and brokers think it’s unlikely that the Bank will reduce the base rate.
Although mortgage rates have been cut in recent times, this will still spark concern for homeowners who want to see much larger falls.
Speaking to i, Aaron Strutt, of brokers Trinity Financial, said: “Many mortgage borrowers would love the MPC to reduce the base rate next week, but it probably will not happen.”
What to do if your fixed rate deal is ending
Those coming to the end of their fixed rate should search for a new one now to secure a cheaper deal, experts suggest.
Mr Strutt said: “For those with at least 40 per cent equity in their home they may well be able to take a five-year fix around 4.1 per cent or a two-year fix around 4.5 per cent. These rates offer pretty decent value for money especially given some of the rates we had not that long ago.
“They may well come down over the coming weeks which means borrowers potentially could amend their mortgage offers and swap to lower deals.”
Most lenders offer a six-month window in which homeowners can secure a new deal but also switch to another if a better rate comes on the market.
Ray Boulger, senior mortgage technical at independent brokers John Charcol, added: “It is a toss-up on whether the base rate is cut on 1 August but even if it is not, it is highly probable it will start falling very soon and continue falling in 2025.
“A massive majority of our clients are currently choosing a fixed rate rather than a tracker or discount rate. This is because fixed rates already reflect the expected falls in the base rate and by choosing a fixed rate borrowers effectively get the benefit of lower payments from day one instead of hoping for rate cuts.”
What should I do if I am on a variable rate?
For homeowners on tracker and variable rates, experts advise that they see if they can find better value in a fixed deal.
Mr Strutt continued: “It is worth noting fixes generally undercut the trackers by quite some margin. SVRs are often extremely high and simply not worth taking unless you really need the flexibility of a no early repayment charge product, and your lender is not offering you an alternative.
“The hope is that when the base rate finally comes down, the funding costs will reduce and the outlook for future borrowing costs will be less. This should make it cheaper for lenders to borrow and in theory these costs saving will be passed on to mortgage holders.
“At the moment the mortgage market has picked up, but many borrowers are holding off to see what happened to fixed rates. The likelihood is they will come down, but it may not be by a huge amount. The benchmark for a good value rate may well be around 4 per cent over the coming months.”
The current rate on even the best trackers is about one percentage point higher than the best two-year fixed rates, and nearly 1.5 percentage points higher than five-year fixed rates.
The lowest two-year tracker for remortgages with Barclays is 5.40 per cent – the base rate plus 0.15 per cent. It would need three-quarter point cuts to the base rate before it reached the level of the lowest two-year fixed rate with Halifax, which currently offers a rate of 4.67 per cent.
Elliott Culley, director at Switch Mortgage Finance, said: “If you took a tracker product, you’d be making a loss initially and would need a big swing and need it quickly to make a saving over the first two years.”
Mr Boulger added: “The base rate would have to fall by 1 per cent just to bring the interest rate on a tracker mortgage down to the same level as a two-year fix, let alone be cheaper. Many people also value the budgeting certainty that a fixed rate mortgage provides and so for most people the choice will be how long to fix for, not whether to choose a fixed rate or tracker.”
One benefit of many tracker and discount mortgages is that they have no early repayment charges, a fee homeowners must pay if they switch to another deal before the end of their contract.
This could work for those who are coming off a fixed rate but would like to wait before deciding on a new deal.
However, this is still not enough of an incentive to stick with a tracker instead of a fixed, experts say.
David Hollingworth, associate director of L&C Mortgages, said: “Most people have continued to take a fixed rate. Rates are still rather lower than those that can be secured on a tracker due to the fact that base rate is yet to fall.
“That will change over time but in the near term I still expect that most borrowers will edge toward a fixed rate, partly because of the price and partly because they prefer the certainty of knowing that it can’t change.”
What if I’m a first-time buyer?
Ideally, you would buy your first home when both house prices and mortgage rates reach a low point.
However, this can be difficult, so you should consider a price point and mortgage rate that you are happy with.
It is worth getting professional advice as a broker can tell you what deals are available and advise which one is right for you.
It is likely they will recommend a fixed term deal as they are often much cheaper than variable alternatives.