Homeowners’ hopes that mortgage costs will continue to fall were dealt a blow this morning when new figures showed inflation had unexpectedly risen to 4pc last month.
It was the first time in ten months that the UK consumer price index rose after slowing to 3.9pc in November, the lowest level in more than two years.
Borrowers whose mortgage agreements are coming to an end may have considered delaying a new agreement in the hope that interest rates would continue to decline for the foreseeable future.
Mortgage lenders have cut rates in recent weeks – NatWest, Metro Bank, TSB and HSBC this week alone.
But today’s higher-than-expected inflation numbers could throw a spanner in the works by slowing the recent wave of rate cuts. So should homeowners make a deal – or continue hoping that rates can fall even further in the coming weeks?
Inflation figures showed inflation unexpectedly rose to 4pc last month, the first time the UK consumer price index has risen in ten months
Should I take out a fixed rate mortgage?
Current inflation rates may put a damper on the number of rate cuts borrowers have seen in recent weeks. This could mean that it could take longer for substantially better mortgage offers to appear on the market.
That’s because higher-than-expected inflation increases the likelihood that the Bank of England will delay cutting its base rate as it keeps it high to control inflation.
Forecasters had previously expected the Bank of England to start cutting key interest rates as early as May.
But today’s numbers have tempered expectations. Economists now predict that the bank will cut interest rates in June.
Two-year UK government bond yields rose after the inflation announcement as markets adjusted their expectations, a sign that expectations of an earlier rate cut had tempered.
The base rate is currently at a 15-year high of 5.25pc, pushing up mortgage rates for millions of homeowners as the cost of borrowing money has become more expensive.
However, it is not a given that the early signs of the worsening outlook indicate that lenders will take the prospects for higher inflation rates to heart and continue to cut rates.
Santander and Skipton have already shrugged off the rise in inflation and this morning announced further cuts to their fixed rate deals.
How can I keep a better rate?
If you need to take out a new mortgage but don’t want to commit to a fixed rate deal just yet, the worst thing you can do is take no action at all and move on to your lender’s standard variable rate (SVR).
While it’s true that you’re not locked into an SVR and that their interest rate can fall if the Bank of England base rate falls, they tend to be eye-wateringly expensive.
David Hollingworth, estate agent at L&C Mortgages, warns: ‘There is a lot of good news in the market, but that can lead to people being even more unsure about what to do.
‘Don’t fall for an SVR. SVRs are much higher. Even if interest rates fall further in two or three months, the SVRs will virtually erode all your savings.”
The average SVR was 8.18 percent as of January 1, according to MoneyfactsCompare, more than double the five-year deals of less than four percent available now.
Mortgage lenders have cut rates in recent weeks – NatWest, Metro Bank, TSB and HSBC this week alone
However, if you don’t want to lock yourself into a fixed-rate deal in the hope that rates will drop in the short term, there is another option.
Rather than depending on your lender’s SVR, sign up for a tracker mortgage. These similarly move up or down in line with the Bank of England base rate, but are generally significantly cheaper than a lender’s SVR.
According to MoneyfactsCompare, the average two-year tracker mortgage is currently 6.16 percent.
The best deals include a tracker mortgage from Barclays, currently at 5.39 percent, set at the Bank of England base rate plus 0.14 percentage points. Leek Building Society has a tracker mortgage with a discount of 4.99 percent for two years.
While tracker mortgages tend to be slightly more expensive than fixed rate deals, they have other useful selling points if you think rates will fall further in the short term and want to hold out better. Firstly, unlike fixed rate deals, most tracker mortgages don’t have early repayment fees, so you can forego these when you find a fixed rate deal you’re keen to take out. Secondly, most tracker mortgages rise and fall in line with the base rate, so – unlike a fixed rate deal – if rates fall you will see your monthly costs fall.
What mortgage interest rate can I get now if I fix?
According to interest rate monitor Moneyfacts Compare, the average two-year deal is now 5.62pc, down from a high of 6.86pc. in July last year.
Five-year contracts have also fallen to 5.24 pc, after a peak of 6.37 pc.
Lenders have been locked in a fierce price war over the past two weeks as they rush to cut rates to lure new customers.
Halifax, HSBC, Santander and Barclays have all announced major rate cuts in the past two weeks, making Nationwide Building Society the only major lender not to have cut its mortgage rates.
The figures could put a damper on interest rate cuts – this is because higher-than-expected inflation increases the likelihood that the Bank of England will delay cutting its base rate as it keeps it high to control inflation
NatWest cut its two- and five-year deals by as much as 0.69 percentage points on Tuesday, making it the third major lender to offer five-year deals below 4pc. offers.
Borrowers looking to change contracts and own 40% of their property can take out a five-year contract at 3.94% with a fee of £995.
Meanwhile, HSBC announced a second round of cuts to its five-year deals on Tuesday, cutting rates by up to 0.4 percentage points.
Homeowners with a 5 pct deposit. can now sign a five-year deal for 4.99 pc. with £350 cashback.
While this new wave of rate cuts is a promising start for homeowners in 2024, Coreco Mortgages’ Andrew Montlake cautions against expecting further cuts of the same rapid nature.
He said: ‘We expect interest rates to continue to fall, but not as dramatically as we have seen them do recently. In recent days we have seen interest rates on swaps and government bonds rise slightly.’
Swap rates are financial metrics used by mortgage lenders to price their deals based on what markets think will happen to interest rates next.
How long do I have to repair?
Ray Boulger of broker John Charcol says two-year fixes are better than longer-term fixes for households wanting to see how the market develops.
“The difference between a two-year fix and a five-year fix is about half a percentage point. For those two years you pay half a percentage point more,” he says.
The average two-year deal now stands at 5.62pc, down from a high of 6.86pc. in July last year, according to interest rate controller Moneyfacts Compare
‘I expect interest rates to be lower in two years, but interest rates need to be at least 1 percentage point lower for the two-year fix to be worthwhile. The question is: do you want to play the markets?’
For more cautious homeowners, the stability of a five-year fix will provide certainty over their highest monthly payment in the medium term, he adds.
Also keep in mind that every time you take out a new mortgage, you may have to pay new costs. If you opt for a two-year contract, you may be charged more than if you opted for a five-year contract. You must consider the impact of the fees in your calculations.
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