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, according to 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, depending on inflation and wages next month.
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.
Fixed or tracker?
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 onto 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 next 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: “It ultimately comes down to your risk appetite. Two and five-year fixes may be more expensive, but some want to know they can afford all future payments.
“Variable rates are a bet and you have to accept you’re taking a risk. At the moment, your risk appetite really matters if you’re taking out a mortgage.
“Borrowers haven’t had to bet on the market like this since rates fell dramatically in 2007 after the crash.”
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 of England.
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 Building Society, said this is because borrowers have already been betting that rates will come down towards the end of 2024.
He said: “If you look at actual behaviour, 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 of England has raised interest rates 14 consecutive times over the past two years. Currently, economists expect the Bank 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 Bank 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.”
Rate rises may be slowing, but do not expect them to fall fast
The Bank 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 this data has 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 remain high.
Inflation has fallen to 6.7pc, but the Bank of England needs to force it much further down to its 2pc target.
Ms Haque said: “What’s more interesting is what this means for November [the next Bank Rate meeting].
“The Bank of England not raising rates today will mean we are more dependent on data coming out in October and swap rates which constantly oscillate.
“Once increases to the Bank Rate stop, it is expected that it will remain level for the next 12 to 18 months before beginning to fall.”
She added: “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 sees Bank Rate falling to around 3.75pc.
“It is possible they will come down sooner and by more, but for that we would either need to see something go very wrong on growth and employment, or very right on inflation. And for the moment, we are not forecasting either of those things.”
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.
He said: “Indeed, we’ve seen a reduction in swap rates [market rates which underpin mortgage costs] on the back of the inflation data and given that swap rates influence how mortgages are priced – regardless of the Bank Rate decision – mortgage rates are likely to continue their downward trend because potential rises have already been priced in.
“There may still be more bumps in the road, given the range of complex factors impacting on the economy and markets. What is clear is that we’re unlikely to see a return any time soon to the historically low rates which have become the norm over the past two decades.”
Save now for when you remortgage to soften the blow
For those with a remortgage date looming, there are things they can do now to soften the blow when it finally comes.
Charlotte Harrison, mortgage boss at Skipton Building Society, said borrowers should start looking now at their potential future monthly payments so they can budget and avoid a shock when they reach the end of their fixed-rate deal.
She added: “Borrowers should start putting money to one side ahead of their rate switch, so they can pay some of that balance off at maturity.
“We know historically, the low-rate environment hasn’t spurred many overpayments. But borrowers can significantly lower repayments by paying down their loan balance.
“There’s some fantastic interest-paying savings accounts available right now. So your savings will accrue interest and compound while you build up a pot.”
Fixed-rate mortgage or tracker? How to tackle high interest rates