A huge chunk of our mortgages are on fixed rates. That means millions of people still haven’t faced the full horror of rising interest rates. All that is set to change for the 1.4 million who hit the end of a fixed deal in 2023.
Most of them were originally fixed at less than 2%. With average two-year mortgages at just over 5.2% at the time of writing, they might well be wondering whether it’s worth remortgaging this year. And if it is, what kind of approach makes most sense for them.
What’s next for mortgage rates?
Any decision starts with where mortgage rates are right now, and where they’re heading.
We saw some huge rises in the wake of the mini-budget towards the end of 2022, and the average two-year deal broke through 6% at the end of the year. Since then, they’ve been easing. We had a few ups and downs after March’s surprise inflation figure, but more recently they’ve been trending down again.
As another Bank of England (BoE) rise in May is widely expected, it would be unlikely to produce massive market movements. The jury is out on whether this will be the final hike though.
It’s reasonable to expect inflation to be significantly lower in the second half of 2023, so we could be coming to the end of a high point in the rate cycle. That means mortgage lenders have less need to price in future hikes, so deals could continue to trend downwards.
Significant falls in inflation could require a BoE rate cut, which is likely to be much further off. An awful lot will depend on how inflation fares in the coming months, and how the economy holds up in the interim. But it’s reasonable to expect it to take until the beginning of 2024 before the BoE starts cutting.
Coming to the end of your mortgage deal – what are your options?
If you’re coming to the end of a mortgage deal, you have a number of options.
Revert to the standard variable rate
You can avoid remortgaging entirely, revert to the standard variable rate (SVR), and wait for deals to fall before fixing.
The huge drawback of this approach is that the average SVR is currently sky-high, at 7.12%, so you’ll pay dearly for holding off. When compared to the rock bottom price you might have fixed at, it’s going to be even more painful.
To add to the headache, you don’t know how long you’ll have to wait for fixed mortgages to move as far as you need them to before you’re prepared to bite the bullet.
Remortgage onto a variable rate
Alternatively, you could remortgage onto a variable rate. That would be on the understanding that if the BoE hikes once or twice more, it could get a bit more expensive, and remain so for a while.
If you opted for a two-year variable deal, when you came to the end of it, there’s a chance that fixed rates could be lower, so you could snap up a cheap deal. You could remortgage onto a variable product for longer, and if they fell even further over five years, you could snap up a bargain. However, the further ahead you forecast, the more uncertainty you add to the process.
Some people might want to remortgage onto a variable deal, and switch when fixed rates fall. You would need to factor in any arrangement fees and any penalty for early repayment – if there is one – and check whether it would save you any money overall.
You’d also need to consider when you would be prepared to fix. You’re not going to know that mortgages have hit the bottom until after they’ve started rising again. So you’d have to focus instead on what you can afford over the coming years.
Fix now?
Finally, you could opt for a fixed rate now. Unfortunately, there’s a good chance it will be considerably higher than the one you’re currently on. And if they do keep trending south, over the coming months, your deal could look comparatively less attractive.
However, you’ll have the security of knowing exactly what you’ll be paying over the fixed period, and for some people, certainty is a major factor.
If you do choose to fix now, there’s the question of how long you fix for.
Right now, the five-year rate is lower than the two-year one. This is because the market expects a lag before the BoE cuts, so average rates could remain reasonably high for much of the two-year deal. After that, however, forecasts of lower inflation and concerns about the strength of the economy indicate that we could get a number of cuts. So further into a five-year fix, overall rates could be lower.
It means you could fix for two years in the hope that when you come to remortgage again, the fixed products on offer might be cheaper.
Alternatively, you might want the security of knowing where you stand over the next five years. You might be prepared to accept that rates elsewhere might well be significantly lower as you go further into your fixed period.
Finding what’s right for you
There’s no one right approach that suits everyone.
Some people are prepared to pay more for a fix right now, because certainty is a major priority. Others will be keen to pay as little as possible, and have the flexibility in their finances to cope if a variable rate rises more than they expect.
The only solution is to consider what you can afford and what your priorities are.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.
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