Fixed for five years? Two? Or a tracker? The mortgage gamble a million families don’t want to take
Families looking to take out a new mortgage face a difficult choice: make a long-term deal or hold out in the hope that interest rates will fall in the near future.
Whatever they do, the million people whose deals expire this year will have to pay more. The Bank of England raised interest rates to 4.25 percent last month, the eleventh increase in a row, driving up the cost of borrowing.
Mortgage rates have fallen from their highs in the wake of Liz Truss’ mini budget in September. But available deals are still higher than they have been for more than a decade.
According to Moneyfacts, the average two-year fixed mortgage rate is 5.32 percent, with a five-year fix at 5 percent. Around this time last year, those rates were 2.65 percent and 2.88 percent respectively. Forecasters expect interest rates to stabilize at 4 to 5 percent this year before falling gradually in 2024.
Experts warn that predicting what will happen is a gamble and advice from mortgage advisers is essential.
According to Moneyfacts, the average two-year fixed mortgage rate is 5.32 percent, with a five-year fix at 5 percent. Stock image of townhouses
The average rates shown are per the first available day of the month, unless stated otherwise. SOURCE: Moneyfactscompare.co.uk
Greg Marsh, household accounts manager nous.co, said: ‘Those looking for a new mortgage are in a difficult position and have to weigh up how much they are willing to gamble on interest rates falling next year.
“Another factor is what is happening in the housing market. Rising house prices are sometimes seen as a fact of life in the UK, but this is a misguided view.
“If you take into account skyrocketing inflation, house prices are falling and most are predicting it will get even worse next year.”
Rachel Springall, financial expert at moneyfactscompare.co.uk, said: ‘Whether it’s the right time to get a mortgage depends on individual circumstances, so getting advice is essential.’
What are the options if you have to refinance now?
1. Get a cheaper long-term deal
Households could opt for a long-term mortgage with a term of five years or longer. These deals are cheaper as markets expect interest rates to fall next year.
This option offers security for a longer period of time, but means you won’t see the benefits once rates start to fall.
What does this mean for households looking for a new deal?
Take our fictional couple Faisel and Sarah. They are first-time buyers living in Manchester buying a house for £295,000 with a £45,000 down payment. Their problem is that they take out a large mortgage with a high loan-to-value rate when rates were more favorable.
They are also afraid that the value of their home could fall, potentially leaving them with negative equity. So they want to get the cheapest deal and like the security that a long-term offer offers.
According to Mojo Hypotheken, the average five-year fixed interest rate is now 4.75 percent. Faisel and Sarah could lock in this rate, meaning their monthly payments would be £1,425.29.
They know they can afford these payments, so they want to prioritize the ability to plan their finances. If rates fall in the next five years, the couple would not benefit.
If they went for a two-year fix, the refunds would be £1,152.81, or £1,886.68 for a tracker.
2. Opt for a shorter-term contract
An alternative would be to choose a shorter fixed deal, which now costs more. The potential payoff is the hope that cheaper deals are likely to be available when the contract expires.
This could work for a couple like John and Rachel, who live in London. They bought their house for £450,000 five years ago and still have £350,000 to pay.
Their current deal, which is coming to an end, will see them pay £1,752 a month, based on an interest rate of 3.5 per cent.
They are confident that interest rates will be lower in two years and are willing to pay more in the short term to get a cheaper rate in 2025.
The average two-year fixed rate offered this week is 5.415 percent, according to Mojo Mortgages.
They can sign up for this rate, with monthly payments of £2,130.54. They are prepared to accept higher payments in the coming years, so that they can then switch. If they went for a five-year fix, their payments would be £1,995.41 or £2,641.35 on a tracker.
3. Stay on a tracker for now
A tracker mortgage is another option – make sure you choose one with no prepayment fees. These move in line with the Bank of England’s base rate and can therefore go up or down. Costs are likely to rise further this year as the Bank of England is expected to raise interest rates to 4.5 percent before starting to cut.
The advantage here is the flexibility to take advantage of cheaper rates as they come along.
This could work for a household like Ben and Annie’s. They live in Leicester with their two children and have paid off a large part of their mortgage. They still have £125,000 to pay on a £230,000 property. Their current deal has an interest rate of 3.5 per cent and a 15-year repayment period, and monthly payments of £894.
The family is financially comfortable and willing to take some risk, with higher payments for a short period of time. The average tracker rate offered this week is 4.75 percent, according to Mojo Mortgages.
For Ben and Annie, this means a monthly payment of £943.34 based on a 15-year repayment period. Their payment would rise to £989 later in the year if their tracker rate increased by 0.25 percentage points, in line with projections.
But the deal would give them the option to switch to a new and cheaper deal as soon as prices drop, without having to pay a penalty for ending their deal early.
In the short term, however, a five-year and a two-year tracker would be cheaper, at £712.65 and £760.91 respectively.
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