The reversing of many of the mini-Budget measures has stabilized base rate expectations. With the peak forecast of 6 per cent now reduced to around 5.25 per cent. The question is whether mortgage rates will also settle down. With Money facts revealing that the average two-year fixed-rate mortgage is 6.52 per cent. While the average five-year fix is now 6.36 per cent. It is important to remember that these are average rates. With cheaper products available for those with bigger deposits. But they still significantly higher than a year ago. Where the average two and five-year fixed rates were 2.34 and 2.64 per cent respectively.
Unsurprisingly, in the past few months borrowers have been rushing to fix their mortgages to protect themselves from rising interest rates. However, volatile Swap rates are making it very difficult for lenders to price fixed-rate mortgages. Because they rise again almost as soon as the product is launched. A Swap rate is the rate mortgage lenders pay to get the funding which enables them to offer fixed-rate mortgages; they rose dramatically due to market expectations around rising interest rates, fueled by economic uncertainty, resulting in higher mortgage rates. Swap rates have calmed a little but fixed-rate mortgages remain relatively expensive as lenders wait to see what happens to the economic outlook.
Fixed rate pricing
So what should borrowers coming up to remortgage or looking to buy a new property do? While the expectation is that fixed-rate pricing may come down a little, this may not happen anytime soon. Further, higher interest rates are on the cards and this will be priced into mortgage products.
It may be time to consider a base-rate tracker with no penalties as these are priced significantly cheaper than their fixed equivalents, at least initially. If you opt for one with no early repayment charges (ERCs) like our client in this month’s case study (see below). You have maximum flexibility as you can move onto a fixed rate should pricing become more competitive and not pay a penalty for doing so.
For example, Barclays has a two-year base-rate tracker with a payrate of 3 per cent (0.75 per cent over bank base rate). Available at 60 per cent LTV with £999 fee and no ERCs. On a £300,000 mortgage, this works out at £1,423 per month on a repayment basis. Compared with 5.89 per cent if you opted for the cheapest two-year fix from Nationwide (also £999 fee), giving a monthly payment of £1,913.
Even if base rate does rise by 1 per cent at November’s meeting as many are expecting. Your monthly payments would rise to £1,584 on the tracker, still considerably less than on the fix. Base rate would need to rise to 5.25 per cent from its current level of 2.25 per cent for you to be worse off with the tracker.
AWS Private Finance
If you are on a tight budget and would struggle with your mortgage. If rates were to rise, then a fixed rate makes sense. However, if you have a bit more leeway, it may be worth considering a variable rate with no ERCs. So you could switch to a fixed-rate mortgage once they look more reasonably priced. Or use bonus income and dividend payments to pay down the balance more quickly.
It is important to plan ahead as much as possible. Especially as mortgage products can be booked up to six months before you need them. A whole-of-market broker such as AWS Private Finance has access to all the deals on the market and can advise as to the right one for your circumstances. Whether that is a fixed rate or base-rate tracker. Please get in touch for more information.