Twist or stick fixed or variable? For those of us thinking of buying a home or coming to the end of a current mortgage deal, the debate about where interest rates might go feels very real.
Most recent inflation figures suggest that higher interest rates may need to stick around a little longer to curb rising prices, but what does this mean for the rates you might get on your mortgage?
Looking at the options
If you are buying a home or remortgaging a property, you have several options. The first is to stick with a lender’s Standard Variable Rate (SVR). This gives you flexibility. You can change products at any time, and there are no exit penalties or charges for overpaying your mortgage early.
However, Standard Variable Rates are expensive: for example, Barclays’ is currently 7.49 per cent. The Bank of England's Base Rate is currently 4.25 per cent, so it is far above this.
Alternatives include other variable rate or tracker mortgages, where the amount of interest you pay moves with the Base Rate. These do not give you certainty but are likely to be cheaper than the SVR. For example, Nationwide has one at 4.49 per cent tracking the Base Rate for two years, where its Standard Mortgage Rate (like an SVR) is 7.74 per cent.
If neither of these appeal, you can choose to fix the rate of your mortgage. However, you must then decide how long to fix the rate for, with mortgages available with fixed rates from two years to over a decade. The right one for you will depend on what you think interest rates will do next, as well as the degree of certainty you need.
Fixed rates available
At present, you will get cheaper rates for your mortgage if you choose to fix your mortgage for a longer term. According to comparison site USwitch, on April 21, the average two-year fixed-rate mortgage rate in the UK was 5.35%, compared with 4.78 per cent for a five-year fix based on 75 per cent loan to value. The average variable rate was 4.84 per cent.1
This suggests that mortgage companies think that rates will come down in the future – hence longer fixes being cheaper – although the difference is not very large, suggesting that a return to the very low rates of recent years is not on the cards.
What the market thinks will happen next.
Inflation figures announced on Wednesday April 19 were higher than expected, suggesting that the Bank of England may need to raise interest rates further to curb inflation, making mortgages more expensive.2 Inflation remained over 10 per cent, although fell back slightly.
Economists are predicting that there will be a least one more rate rise. Former interest rate setter Michael Saunders said he thought Bank Rate would rise to 4.5 per cent in May, while economists at Swiss Bank UBS are expecting the same.3
Others are even gloomier, with the market betting that rates could reach nearly 5% in September before coming down.4
When they do fall, it may be a gradual affair. Capital Economics is predicting that rates could fall to three per cent at the end of 2024 , while the International Monetary Fund (IMF) believes that, longer term, rates could be nearer 2.5 per cent.5
Your mortgage decision
These forecasts may influence your decision on what to do with your upcoming mortgage renewal or house purchase, with rates set to fall eventually, but not in the short term. There are a number of other factors to consider including any fees for remortgaging, any restrictions on making overpayments if you would like to do so, and whether you would be able to afford any sudden increases in rate if you pick a variable product.
It is worth remembering that, in many cases, it is possible to reserve a mortgage rate and then not use it, so if you have several months before you need to purchase or remortgage you could try to do this via a broker.
It’s also worth remembering that no economist has a crystal ball. Everyone was surprised by the high level of inflation this month, which has led to changed interest rate forecasts. There is no guarantee that rates will rise or fall in line with predictions.
27th May 2023
1 https://www.uswitch.com/mortgages/uk-mortgage-rates-today/
2 https://www.theguardian.com/business/2023/apr/19/uk-inflation-falls-consumer-prices-index
3 https://www.theguardian.com/business/2023/apr/20/bank-of-england-predicted-to-raise-interests-rates-one-more-time-in-may
4 https://news.sky.com/story/will-interest-rates-rise-again-next-month-and-when-will-they-peak-12860760
5 https://www.thisismoney.co.uk/money/mortgageshome/article-11885727/When-rates-start-fall-Base-rate-forecasts.html