Don’t fix your mortgage just yet, say Britain’s lenders

Mortgage borrowers betting on the market should take out a variable rate now with a view to fix next autumn when the Bank Rate is expected to fall again, say banks and their economists.

In a reprieve for borrowers faced with rising bills, the Bank of England decided to keep interest rates at 5.25pc on Thursday. Some experts say a rise in November could still be on the cards.

But it is hoped the worst of the tightening cycle has come to an end, with economists saying central rates are unlikely to rise further from now.

While many borrowers will want to know for certain they can afford their rate and fix – potentially paying more – some may have more of an appetite for risk and be happy to move on to a variable rate like a tracker.

Trackers follow the Bank Rate which economists say is unlikely to change for the next 12 to 18 months if rates have now peaked.

Mark Bogard, chief executive of Family Building Society, said: “If you just look at the market and interest rate expectations for the next 10 Monetary Policy Committee meetings, you’d probably go variable then fix. Rates are set to come down by autumn, which is when you could look to lock in.”

Unlike fixed-rate deals, the majority of tracker rate deals do not punish customers for leaving them early, allowing borrowers to be more nimble – playing the market and fixing into a cheaper deal when rates drop.

Mr Bogard added: “At the moment, your risk appetite really matters if you’re taking out a mortgage.”

Over the past year, borrowers have increasingly opted for two-year fixes – despite them being around 0.7 percentage points more expensive than five-year deals, according to the Bank.

The proportion of borrowers with two-year deals has roughly doubled, from 25pc of overall deals in 2022 to 50pc today. Robert Gardiner, chief economist at Nationwide, said this is because borrowers have already been betting that rates will come down towards the end of 2024.

He said: “People want certainty with a view to lock in a better rate if they fall. They’re prepared to pay a bit more now if they can save on monthly repayments come their renewal date.”

The Bank has raised interest rates 14 consecutive times over the past two years. Currently, economists expect the Rate to fall to just under 4pc over the next five years. Mr Gardiner said: “In November 2021, markets were projecting a 1pc ‘settling’ rate [what the Rate would be in five years’ time]. Now that projection is 3.8pc.

“We also have to remember that monetary policy acts with a lag. So, the Bank’s changes haven’t had their full effect on the economy yet.

“Markets could revise their expectations if it becomes clear the Bank has done enough, or even gone too far. Then mortgage rates could come down even more.”

The Rate relies on three key data measures – inflation, wage growth, and the labour market.

Frances Haque, chief economist at Santander, said it has been “a long time” since the data have been so mixed. While there was a larger drop in core inflation than expected this week, GDP has also dropped and unemployment is rising.

Wage growth is also still very strong, which can cause inflation to

‘At the moment, your risk appetite really matters if you’re taking out a mortgage’

remain high. Inflation has fallen to 6.7pc, but the Bank needs to force it much further down to its 2pc target.

Ms Haque said: “Once increases to the Rate stop, it is expected to remain level for the next 12 to 18 months before beginning to fall. We won’t see anything significant until 2025.”

Liz Martins, economist at HSBC, agreed rates were unlikely to fall meaningfully until 2025.

She added: “Even over the next five years, the market only foreseesthe Rate falling to around 3.75pc.”

This week, NatWest and TSB have announced mortgage cuts of up to 0.40 and 0.25 percentage points respectively. Ben Merritt, director of mortgages at Yorkshire Building Society, said borrowers could now be reassured there are unlikely to be further dramatic increases in borrowing costs.

Charlotte Harrison, at Skipton Building Society, said borrowers should start looking now at their potential future monthly payments so they can budget and avoid a shock at the end of their fixed-rate deal.