There are warnings over an uptick in mortgage rates after some of the biggest UK mortgage lenders increased their deals in recent days, due to rising swap rates and market jitters over the forthcoming Budget.
This comes as many homeowners looking to remortgage are already facing much higher rates than what they’ve been used to.
However, it’s still expected that the Bank of England will reduce its Bank Rate at least once more by the end of the year, which could have a downward effect on mortgage rates.
More than 1.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2024 – here’s what you should do if you’re one of them.
Where are mortgage rates now?
The average two-year fixed rate is currently 5.37pc; the average five-year fix is priced slightly cheaper at 5.06pc, according to analyst Moneyfacts.
The average two-year tracker is 5.67pc.
It’s possible to get much cheaper deals than this, but the lowest rates are often reserved for those who are remortgaging and seeking to borrow no more than 60pc of the property’s value.
One decision lots of homeowners have been struggling with is whether to commit to a fixed-rate deal, or opt for a tracker mortgage that’s linked to the Bank Rate. Should interest rates reduce further, those with tracker mortgages will see their mortgage bills get cheaper – until then, you might find yourself on a deal that’s more expensive than the cheapest fixed deals.
Our guide on the fixed rate vs tracker dilemma can help.
Will mortgages continue to fall despite the inflation rise?
The Consumer Prices Index (CPI) measure of inflation measured 1.7pc in September, down from 2.2pc in August. It’s the first time inflation has measured below the Bank of England’s 2pc target in three years, and is largely down to falling prices for air fares and motor fuels, according to the Office for National Statistics.
The figures reinforce the expectation that the Bank Rate will be cut at the Bank of England’s Monetary Policy Committee (MPC) meeting on November 7.
In August, the Bank of England made 0.25 percentage point cut to its central interest rate, known as the Bank Rate, after 14 consecutive raises since December 2021, taking it to 5pc after a 12 month stint at 5.25pc. It held steady at the MPC’s last meeting in September.
Alice Haine, personal finance analyst at online investment platform Bestinvest, says: “For homeowners and first-time buyers, lower inflation combined with slightly more competitive mortgage rates and product choice means affordability levels are improving.
“Average mortgage rates for two- and five-year fixed-rate deals dropped to their lowest level since May 2023 between the start of September and the start of October. While there has been some volatility since then, with some lenders increasing rates amid concerns about Labour’s ‘painful’ Budget and the effect geopolitical tensions in the Middle East might have on oil prices, the general outlook for mortgage rates remains positive.
“A second interest rate reduction in November could energise the mortgage market even further with rates falling at an even faster pace. For now, the big challenge for new buyers and those refinancing is whether to opt for a fixed or variable deal, which is why it is wise to seek the services of an independent mortgage broker who can advise on the best options for each individual situation.
“Even if a second interest rate cut does materialise in November, something that particularly benefits first-time buyers, the 1.4 million borrowers emerging from a fixed-rate mortgage in the next 12 months are still facing an average jump in their monthly repayments of £150.”
Lenders’ decisions to change mortgage rates are affected by a number of factors; what is predicted to happen to interest rates, as well as other market factors such as swap rates.
Where can I find the cheapest interest rates?
One of the cheapest two-year fixed-rate mortgages available across the UK for someone remortgaging is now 3.89pc, offered by Santander according to Moneyfacts. It is available for those with a 40pc deposit or equity, and has a £999 product fee.
Fix for five years, and one of the cheapest rates available is 3.78pc, from Santander, again for those with 40pc equity. It has a £999 product fee.
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.
Lenders commonly set fees between £899 and £1,999, but some use percentages instead, such as 0.5pc of the overall loan amount.
Adrian Anderson, of broker Anderson Harris, said: “Don’t just look at the headline rate. Consider the overall cost of the deal, including any fees and whether the lender will pay for a mortgage valuation and legal conveyance, which most banks do.”
If you are locking in for longer than two years then be sure to check any repayment penalties which would apply should your circumstances change and you need to exit the deal early – these can run into the thousands of pounds.
Our mortgage increase calculator can show how much your bills will change as a result of remortgaging to a new deal.
How long should I lock in a rate for?
Thousands of today’s homeowners with fixed mortgages are still on rates agreed when the Bank Rate was far lower than it is today. This means they are likely to face a steep increase in their payments when they reach the end of their current deal and take out a new loan.
This is because while fixed rates may be falling, the cost of borrowing is still inflated when compared with mortgages which were locked in two or five years ago. Borrowers coming off those deals and searching for a new rate are very likely to face higher rates.
Rather than opting for five or 10-year deals, brokers are suggesting a typical borrower should fix for two years as this would minimise the amount of time spent fixed on an inflated rate.
Mortgage rates are predicted to have fallen by 2026, when homeowners will be able to make the most of cheaper repayments. However, the market has proved to be unpredictable, and how long each household fixes will depend on their individual financial circumstances.
How can I get the best rate for my mortgage?
Borrowers who put more equity into a property make themselves less risky customers, increasing the chances a lender will be happier to offer them lower interest rates.
Banks use the term “loan-to-value ratio” (LTV) to label how much they lend a borrower against a home. For example, a £160,000 mortgage on a £200,000 home would be a loan-to-value of 80pc.
A lower loan-to-value and bigger deposit will usually unlock lower interest rates. Mr Anderson said: “It can make quite a big difference to the amount of interest you pay over the term of the deal.
“So if you have cash available you may want to consider paying down part of the mortgage to access a better rate.”
Our mortgage overpayment calculator can help you weigh up whether you’re better off overpaying your mortgage, or putting your extra cash into a savings account.
Households with a significant cash pile could also access lower rates by using an offset mortgage. A handful of banks allow borrowers to reduce the cost of their loan using cash held in an account with the same lender.
For example, a customer borrowing a £500,000 mortgage and with £200,000 in savings would only pay interest on £300,000 of the loan, but will forfeit any interest on the cash pot.
Based on a mortgage interest rate of 4.5pc, this would reduce monthly interest from £1,873 a month to £1,124 – a saving of £749 each month.
Mr Anderson said: “Offset mortgages are proving especially popular as tax thresholds are shrinking and reducing households’ personal allowance.
“There should be no tax to pay on savings used to offset the mortgage balance and you should not be paying interest on the mortgage balance offset by the cash funds. The account should also be instant access so you still have access to liquidity if circumstances change.”
Borrowers opting for a more specialist mortgage, such as an offset deal, should consult a mortgage adviser. The market is changing rapidly and with savings rates also on the rise, independent advice could save a lot of money.
What will happen to mortgage rates?
For those needing to remortgage this year, or early in 2025, they might need to prepare for a higher mortgage rate than they had perhaps hoped for – and it could be prudent to “lock in” a deal early in case rates continue to rise. Many lenders will allow you to sign up for a new deal six months in advance; if rates rise during that time you won’t be affected, and if they fall then you can apply for a cheaper deal instead.
Nicholas Mendes of broker John Charcol says: “We expect to see some lenders begin to reprice their products, particularly among specialist lenders and smaller building societies. If swap rates continue to rise, it’s likely that the lower LTV best mortgage deals, which are already slim in margins for lenders, will start to reprice with slight adjustment upwards, with more widespread repricing if competitors do the same.
“It’s important to stress anyone nearing the end of their fixed-rate mortgage secure a new deal now. Continuously review the market, or better yet, use a broker who can monitor it for you and advise when a better deal becomes available.
“While nothing is guaranteed, and various factors may delay the passing on of rate reductions, it’s important to take proactive steps to secure the best deal, rather than adopting a ‘wait and hope’ approach.”
What about interest-only mortgages?
Any homeowners struggling to pay their mortgage bills are able to switch to interest-only deals without a formal repayment plan. City watchdog, the Financial Conduct Authority, announced the change last year in a bid to help lenders provide mortgage forbearance at scale.
However, once the temporary interest-free period is over, homeowners must make up their repayments. To switch to a permanent interest-only deal, you’ll still need a credible repayment plan.
