Last week’s Bank of England interest rate cut, the first since 2020, spelled good news for millions of homeowners and would-be buyers – but it has also given them lots to think about.
If you are looking to buy a home, what sort of mortgage do you go for, and is this going to push house prices even higher? And if your existing mortgage deal is about to end, should you grab another one right now, or hold fire in case lenders launch cheaper products?
The cut, from 5.25% to 5%, should translate into lower borrowing costs for homeowners with a base rate tracker mortgage, or whose monthly payments are linked to their lender’s standard variable rate (SVR).
However, almost 7m of the UK’s 8.4m existing residential mortgages are on a fixed rate, so most people won’t see any change. A chunk will, however, need to consider their options over the next few months because their current deal is coming to an end.
Here we round up some of the advice from mortgage brokers.
I’m buying a home – should I go for a fixed rate or a tracker?
Both have their plus points. A fixed-rate mortgage offers the certainty of set monthly payments and is arguably the safest for those whose finances are on the tighter side, which will include many first-time buyers.
However, with most experts anticipating more interest rate cuts – many economists believe we will see at least one more before the end of this year – some borrowers will be leaning towards a base-rate tracker, so they can benefit from lower payments in future. With a tracker, the rate moves down, or up, in line with the official base rate.
“I think most people will still choose to fix,” says David Hollingworth at broker firm L&C Mortgages. As well as the payment certainty fixed rates offer, these deals are also typically cheaper than trackers at the moment, he adds.
The good news for those favouring a fix is that the rates on new deals have been coming down. Just under a fortnight ago, some five-year fixed-rate mortgages for house purchases priced below 4% went back on sale for the first time since February.
Nationwide building society’s 3.99% five-year fix is available to homebuyers (as opposed to remortgagers) borrowing up to 60% of the property’s value, so this is not one for those who can only manage a small deposit.
For buyers borrowing 90% – that is, putting down a 10% deposit – Virgin Money has a five-year fix at 4.76%. For those who can only manage a 5% deposit, Halifax has a five-year deal at 95% loan-to-value (LTV) with a rate of 5.23%, and a two-year deal priced at 5.55%.
As can be seen, five-year fixed deals are currently a bit cheaper than two-year ones. But some buyers will still prefer a shorter term because they can then review their home loan in a couple of years, and potentially take out a cheaper deal rather than being locked in if rates fall further.
For a two-year tracker at 90%, Barclays is charging 6.1% – the base rate plus 1.1 percentage points. This is 0.55 percentage points above Halifax’s two-year fix, so it’s likely there would need to be three base rate cuts before it was cheaper.
Shall I just sit on the sidelines and wait to see what happens?
Would-be homebuyers may be considering waiting in the hope rates keep coming down. But while the cost of a new fixed rate is expected to continue to drop, many experts believe this will be gradual.
Andrew Montlake, at broker Coreco, says that while Thursday’s rate cut will give more lenders confidence to improve offerings, “don’t expect huge downward spirals”.
For house hunters, a problem with waiting is that if house prices keep rising, any gain from lower mortgage costs could be more than wiped out by a higher property price tag.
On Thursday, in its data covering July, Nationwide said UK house prices had risen at their fastest annual rate since the end of 2022, which may have been partly fuelled by expectations of a base-rate cut.
“Those looking to buy should act quickly since, as demand increases, we may see house prices rise, potentially leading to a return to a sellers’ market and making it harder to get on the property ladder,” says Rohit Kohli at broker The Mortgage Stop.
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My current mortgage deal is about to end. Now what?
Banking trade body UK Finance said last week that about 700,000 people had a fixed-rate mortgage expiring between 1 July and 31 December this year. The vast majority of them face moving on to higher monthly payments.
While the average new five-year fixed-rate mortgage was at 5.38% on Thursday, in August 2019 an equivalent deal had a rate of 2.84%, according to financial data provider Moneyfacts. (Though it could be worse: in November 2022, the average new five-year fixed-rate deal was priced at 6.32%).
Remortgage offers are typically valid for up to six months, so if your deal is ending in four or five months’ time, you can reserve a loan now, and wait to see what happens.
If the cost of new deals has come down, which seems likely, then you are not committed to that mortgage offer. And if, for some reason, they have risen, you have locked in at a lower rate.
Those people who have literally just signed up to a fix, but not yet moved on to it, might want to keep a close eye on the best-buy tables to check for cheaper deals.
What if I go on to my lender’s SVR and should I stay on it?
If you don’t lock into a new deal (either one offered by your current lender, or another provider) when your existing one ends, you will usually go on to your lender’s SVR.
Last week, the average SVR stood at 8.16%, according to Moneyfacts, and some lenders charge a fair bit more: Virgin Money’s is 9.24%.
Being on an SVR could cost you a lot, particularly if you end up sitting on it for a while. Brokers always say there are very few scenarios where someone should stay on the SVR for longer than a few months.
Situations where it may be better to stay on the SVR might include if you are coming towards the end of your mortgage, or you only have a very small balance remaining.
“There’s a danger people will think that sitting on the SVR is a good thing to do,” says Hollingworth. There is a real risk that the lower rate you may eventually enjoy may not be enough to make up for paying a much higher SVR for a few months, he adds.
If you think the cost of a fixed-rate deal is going to fall sharply in future, a better bet than sitting on the SVR could be to move on to a tracker with no early repayment charges (ERCs) for a while. Then, if, and when, new deals do fall in price, you can bail out penalty-free and snap one up.
Barclays has a two-year tracker, free of ERCs, with a rate of 5.15% (base rate plus 0.15 percentage points) for those borrowing a maximum of 60%. But factor in the £999 arrangement fee when you are working out what to do.
All rates were correct at the time of writing
