HOW TO CHOOSE BETWEEN A FIXED OR TRACKER MORTGAGE
After a tumultuous 2023, mortgage borrowers may be relieved to know inflation is on the way down, and the Bank Rate seems to have peaked.
That being said, the Bank Rate has been held at its peak of 5.25pc since August 2023 – and hopeful borrowers may have to wait until August, or even November until it’s reduced.
The Consumer Prices Index (CPI) measure of inflation was 2pc in May, down from 2.3pc in April, according to the Office for National Statistics. This measures the rate at which prices are rising.
While this is the first time since July 2021 that the Bank of England’s 2pc target has been met, it still did not herald a Bank Rate cut at the Bank’s Monetary Policy Committee meeting in June. It’s next announcement is due on August 1.
Huge numbers of home owners have been waiting on “tracker” mortgages for the past two years, hoping for fixed deals to come down before securing their home loans.
While it may be possible to find a fixed deal below the 5.25pc Bank Rate, it’s not as easy as it was at the start of the year, anyone currently on a tracker may be wondering if it’s time to switch.
Is it a bad time to fix?
Average rates for fixed deals have crept up in the past couple of months, currently at 5.97pc for a two-year fix, and 5.53pc for a five-year deal, according to the analyst Moneyfacts. The average two-year tracker, meanwhile, has dipped below its fixed equivalent, at 5.94pc.
Some people may find they’re offered similar rates for both types of mortgages.
One of the cheapest two-year fixed-rate mortgages available across the UK is now 4.75pc, offered by Lloyds Bank, according to Moneyfacts. It has a product fee of £999, and is available for those remortgaging or buying for the first time with 40pc equity. Fix for five years, and the cheapest rate available is 4.28pc, from Santander, again for those with 40pc equity. There is a £999 product fee.
Tracker mortgages could be the right choice for some people – with recent predictions suggesting that those with tracker mortgages could be saving £300 a month by the end of the year once the Bank Rate starts to fall.
“I would suggest a tracker would still make sense for a lot of people as the Bank Rate is likely to reduce in the next two years. However, some tracker rates are 1pc higher than a two-year fix. In this scenario it is more risky to get a tracker as we are unsure when rates will come down and by how much,” said Ashley Thomas, director at Magni Finance, a London-based mortgage broker.
“It depends on the situation, whether you have plans to move, and how much risk you are willing to take.”
Justin Moy, managing director EHF Mortgages, agrees that the “best” deal depends on your attitude to risk: “A nervous borrower who does have concerns about fluctuating rates, and cannot cope with potential increases, will normally be better with a fixed deal, possibly short-term,” he said.
“Both sets of rates are reasonably similar at the moment, so the initial monthly payments should not be a definitive guide to the direction to take. Most trackers products have some form of ‘switch and fix’ option, allowing a borrower to change back to a fixed [mortgage] when they feel comfortable to do so without a penalty, or if rates start showing signs of increase.”
It is important to remember that the lowest interest rates do not necessarily equate to the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
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How long should I fix for?
The cost of borrowing this year will remain inflated, serving as a shock for households coming off rates fixed two or five years ago. More than 1.4 million borrowers will pay higher rates this year as their fixed deal comes to an end, according to figures published by the Office for National Statistics.
Thanks to promising inflation figures over the past few months, the Bank Rate is not expected to rise any further, and hopefully will soon start to fall.
David Hollingworth of L&C Mortgages said: “Mortgage borrowers will be eager to see the Bank Rate begin to fall, but may have to maintain their patience for now.
“However, despite a further drop in the rate of inflation there’s still some speculation that interest rates may need to be held for longer than previously hoped. That could mean that fixed rates are not likely to plunge from here, and with continued uncertainty we could see some edge up a little.
“Many are still preferring to secure a fixed rate to give security, while others are locking in for the shorter term in the hope of improving rates to come. Nonetheless, the five-year rates are still lower, and will give more protection from any further ups and downs over the medium term.
“Trackers continue to attract only a small amount of interest due to the current higher pay rates. That dynamic may shift in time if the future rate path becomes clearer. In the meantime, some may still hope that rapid cuts will come, or like the fact that trackers often don’t require you to be locked in.”
Should I lock in a new deal early?
If you need to remortgage in the next three to six months, it may be possible to secure a new mortgage deal early, which will still be valid by the time you need to actually make the switch.
Locking in a new deal now – whether it’s for a tracker or a fixed-rate – may shield you in case of any further rate rises. After all, if the past couple of years have taught us anything, it’s that the mortgage market can turn in a very short period of time.
Having a new mortgage lined up ahead of time will also save you from spending any time on your lender’s standard variable rate (SVR), which will almost certainly charge far more interest than any fixed or tracker options.
Mr Hollingworth said: “Once an application is made a deal will be secured and that could be done up to six months before the end of the current deal.
“That will mean that borrowers are protected against any further rises in fixed rates, but they can still change to a new deal if rates improve in the meantime.”
It’s a good idea to speak to a mortgage broker to assess your options before making any firm decisions.
If you’re concerned about whether your budget will be able to stretch to higher mortgage costs, talk to your lender.
Sam Richardson, deputy editor of Which? Money, said: “Mortgage lenders are obliged to offer support to their customers, so those struggling to meet mortgage payments should speak to their lender about what help is available. Doing so will not affect your credit rating. Further support may come in the form of temporary break from payments, interest-only repayments or extending the term of the mortgage.”
2024-06-19T08:48:39Z dg43tfdfdgfd
