Written by Matthew Pigrome, Mortgage321
In today's ever-evolving mortgage landscape, homeowners are faced with a crucial decision: should they seize the current fixed rates, or is it prudent to wait and see if they fall even further before locking into their next mortgage deal?
It's a dilemma that has been exacerbated by the recent turbulence in the mortgage market, making it a topic of great interest and debate among experts and borrowers alike.
While it's tempting to play the waiting game, it's important to recognise that the mortgage market has proven itself to be highly unpredictable over the last 12 months. This unpredictability makes the decision to wait a bit of a gamble, to say the least.
However, there's a glimmer of hope on the horizon. Online property portal Zoopla has forecasted that mortgage rates may dip below 5 percent by the end of the year, offering a tantalising incentive to hold off on locking into a new deal—provided, of course, that your budget can withstand the initial shock.
To better understand the potential risks and rewards, Money Mail conducted an analysis of the standard variable rates of top lenders, focusing on the extra interest costs incurred by waiting for fixed rates to potentially drop further.
The mortgage rates experienced a brief respite in the spring, only to surge again after last September's mini-budget, which had a profound impact on the economy. Inflation stubbornly refused to decline as expected, resulting in rising borrowing costs, peaking at a staggering 6.86 percent, according to Moneyfacts, surpassing the highs seen in the previous year.
Recent weeks, however, have brought some relief as banks have begun to trim their fixed rates once more, a welcome development for borrowers already grappling with the prospect of higher monthly payments when remortgaging. Throughout August, the average five-year fixed rate decreased from 6.08 percent to 5.72 percent, while two-year deals dropped from 6.61 percent to 6.32 percent, according to property website Rightmove.
But as fixed rates descend, the Bank of England has continued to raise the base rate, directly impacting the costs associated with variable rate mortgages. This creates a challenging environment for borrowers who may be uncertain about future rate movements.
I advise against the strategy of waiting passively for rates to improve. and emphasise the importance of making informed decisions based on individual circumstances, rather than simply hoping for the best.
Money Mail's analysis delved into the standard variable rates of seven leading lenders, exploring whether it's financially advantageous to wait for six months before committing to a new fixed rate. Notably, there are approximately 773,000 homeowners on a standard variable rate in the UK, a rate influenced by the Bank of England's base rate. When this rate rises, your mortgage rate is likely to follow suit.
Lenders typically reach out to customers up to six months before their mortgage deal expires, providing information on switching and presenting their lowest rates. For homeowners with significant equity in their properties, the prospect of transitioning from a fixed rate of 2 percent or less to a five-year fixed rate might seem enticing, even if it entails an initial monthly payment increase.
To illustrate the potential benefits of waiting, let's consider a Nationwide borrower. They would face a variable rate of 7.99 percent after their fixed deal expires, resulting in monthly payments of £1,927 on a £250,000 loan. If rates were to fall to 5 percent in six months, their new five-year fixed rate would bring monthly payments down to £1,450. While this strategy would incur an additional £2,352 in interest over 28 months, it ultimately pays off.
Barclays and Halifax homeowners, facing rates of 8.74 percent and monthly payments of £2,053, would recoup their initial interest costs after 37 months on a new five-year fix.
HSBC borrowers find themselves in the most favorable position, requiring just 16 months to recover the extra interest paid while on the 6.99 percent standard variable rate, which amounts to £1,765 a month.
Santander and NatWest have standard variable rates at 8.50 percent and 7.74 percent, resulting in monthly payments of £2,013 and £1,886, respectively. Homeowners would need to wait between 25 to 35 months to break even.
Virgin Money's borrowers face the longest wait. With a rate of 9.24 percent, nearly 4 percentage points higher than the Bank of England's base rate, borrowers would pay £2,139 a month. It would take 44 months to recoup the interest before their wait-and-see plan pays off.
However, while this strategy may have potential long-term benefits, it is indeed a gamble. I emphasize the importance of factoring in the higher monthly payment into your budget when considering this approach. If the base rate rises while you are waiting, your monthly payment could increase even further.
As we look ahead, the next meeting to determine the direction of the base rate is imminent. Should it rise from the current 5.25 percent, most standard variable rates will also follow suit.
The dynamics of fixed rates differ considerably. Rate setters anticipate a future decrease in the base rate, which explains the current trend of falling fixed rates.
I highlight an alternative approach to delaying the commitment to your next fixed deal, a penalty-free tracker mortgage. Tracker mortgages follow the movements of the base rate with a small margin above it.
For example, HSBC is offering a tracker rate of 0.14 percent above the base rate of 5.25 percent, resulting in a rate of 5.39 percent. This option may be more cost-effective than a five-year fixed rate for customers with ample equity. Moreover, transitioning to a tracker deal after your fixed rate expires typically incurs a fee of around £1,000, equivalent to the cost of opting for a new fixed rate. Importantly, tracker mortgages come with no early repayment charges, allowing borrowers to switch to a fixed rate if rates fall or the base rate rises excessively.
In conclusion, while the decision to wait for falling fixed rates may seem appealing, it carries risks that must be carefully considered within the context of your personal financial situation. Some homeowners may prefer the security of locking into a fixed rate now, even with the potential for rates to decrease in the future. Ultimately, the best decision will depend on your individual circumstances and risk tolerance.