Base rate has stuck at 0.1% but should you fix your mortgage? Homeowners breathe a sigh of relief but many can still find cheaper deals… for now
Homeowners breathed a sigh of relief as the Bank of England voted 7-2 not to increase the base rate – which would nudge mortgage rates up with it.
But the Bank has warned that rates may have to rise in months to come and borrowers with standard rate variable mortgages, or who are nearing the end of a fixed rate deal, could still save money by locking in now.
Mortgage rates had already edged up in anticipation of a possible rise, with a wave of lenders pulling their top rates.
But despite that, those coming to the end of two and five-year fixes could still find cheaper deals on offer than their existing home loan.
Those moving home or remortgaging now have a limited choice of mortgages with interest rates under 1%, with only 22 products currently available according to Defaqto
There had been widespread speculation that the Bank would increase its base rate at a meeting of its Monetary Policy Committee today, in an attempt to curb rising inflation.
The base rate influences the rate at which banks price their mortgages, and it has sat at an emergency low of 0.1 per cent since the start of the pandemic.
Before the emergency cuts as coronavirus hit the economy, base rate was 0.75 per cent, which was still historically low.
After initially sticking at their pre-Covid levels, the best home loan rates began to fall in summer last year and a mortgage battle since saw five-year fixed drop below 1 per cent, joining the two-year fixes on offer below that benchmark.
But as rate rise speculation mounted, the number of sub-1 per cent mortgages on the market dropped by nearly three quarters in the week starting on 25 October.
Nonetheless, the current cheapest five-year fixes from Coventry Building Society and Clydesdale bank at 1.19 per cent, and those in the pack behind, are still lower than the best rates before the pandemic.
What has happened to mortgage rates?
There were previously 82 mortgages on the market with rates of 0.99 per cent or lower, but that has now fallen to just 22, according to the financial information service Defaqto.
HSBC revealed plans to hike rates on dozens of fixed deals from today. The bank previously offered the cheapest two-year fixed rate on the market at 0.99 per cent for borrowers with a 40 per cent deposit.
NatWest and TSB also announced rate hikes on a host of loans by up to 0.15 and 0.3 percentage points respectively.
It comes hot on the heels of previous rises that This is Money exclusively revealed in mid-October – when a number of major lenders began to hike rates, with experts warning the tide was turning on ultra-low rates we’ve seen in recent years.
However, while rates have been pushed up from their previous record lows, the increases have generally been marginal.
Increases were most marked for those with 20 per cent deposits during the week that Defaqto monitored, seeing the best buy increase from 1.24 per cent for a 2-year fixed product to 1.64 per cent.
For someone with a £150,000 mortgage, this would increase their payments by £28 per month.
Many other products saw increases of just 0.1 per cent, which would have a much lower impact on their payments.
Remortgage and you may fix at a better rate
Rates on fixed-term mortgages had dropped to record lows of as little as 0.84 per cent in recent months, but those are now gone.
However, given that many homeowners fixed their mortgages several years ago when rates were higher, many who are coming to the end of two or five-year fixed deals today are likely to be able to find new home loans that are cheaper, or priced at a similar level, to their old ones.
This is especially true of borrowers with larger deposits, and those coming off five-year fixed deals.
Anthony Codling, the founder of property data platform Twindig, ran the numbers on the average cost of a mortgage in September this year – the most recent Bank of England figures available – compared with that of September two years ago and September five years ago.
For those with a 40 per cent deposit, it showed the average two-year fix at 1.13 per cent in September 2021, compared to 1.38 per cent in September 2019.
Meanwhile, for those with a 25 per cent deposit, it showed average September 2021 rates at 1.2 per cent compared to 1.55% in 2019.
Borrowers with smaller deposits may miss out though, as at the 10 per cent deposit and 5 per cent deposit level, average rates were higher now than in 2019, at 2.13 per cent compared to 2.09 per cent, and 3.21 per cent compared to 2.99 per cent, respectively.
Will the threat of rising rates dampen house price inflation?
If the base rate were to rise in future, it could also have the effect of dampening the house price rises that have been witnessed over the past year.
Figures published by mortgage lender Nationwide suggest that the typical home has increased in value by £30,000 since the beginning of the pandemic.
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Increase: House prices have shot up by around £30,000 since the pandemic began
Nationwide said that rising mortgage rates would cool the property market, as it would make it harder for borrowers to chase house prices up further.
Nationwide’s chief economist Robert Gardner said: ‘Even if wider economic conditions continue to improve, rising interest rates may exert a cooling influence on the market, though the impact on existing borrowers is likely to be modest, partly as a result of a sharp increase in the cost of living.’
The vast majority of existing borrowers would not be affected immediately, however, as about 80 per cent of Britain’s mortgages are now on fixed rates, added Nationwide.
Tomer Aboody, director of property lender MT Finance, says that a base rate rise is still on the cards in the near future: ‘This is likely to be a minimal increase, the first of a few gradual raises over the next couple of years.
‘It will help keep inflation in check, as well as dampen down the prospect of future house price increases. This is welcome, as the market has been frenzied over the past year.’
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The cost of servicing a mortgage is increasing – but those coming off two or five-year fixed rates may still find a new deal that is cheaper than their existing one
Should you fix your mortgage now?
While rates are broadly still lower than they were when most people on fixed terms agreed their current mortgages, they could still rise and become more expensive in the coming weeks and months.
Interest rates are still very low compared to previous years and there are still some great deals to be had
Katie Brain, Defaqto
There is a sense of inevitability among experts that the rock bottom rates borrowers have enjoyed recently could not last forever and may now be gone.
However, they urge homeowners to look at what are still historically cheap mortgages.
Katie Brain, consumer banking expert at Defaqto, says: ‘We have enjoyed record low interest rates for a long-time and they had to start going back up at some point.
‘For anyone who needs a mortgage, there is never a good time for this. However, interest rates are still very low compared to previous years and there are still some great deals to be had.’
Here is our quick guide to what to consider and you can check live mortgage rates to see the best deals for you here.
Nearing the end of a fix
Borrowers nearing the end of a fixed deal to look at locking in to lock a lower rate now. Many mortgage lenders will allow borrowers to hold new fixed rate deals three or even six months ahead.
Standard variable rate borrowers
Anyone on their lender’s standard variable rate, many of which are at 4 per cent or higher, should look at switching mortgage, as they have the greatest opportunity to save.
Those within fixed rate deals
Those in the middle of a fixed term will almost certainly need to pay an early repayment charge if they switch, which can be up to 5 per cent of the total mortgage balance, so switching is unlikely to make sense. However, it could still be worth calculating the cost, as some lenders taper down the ERC for each year of the fixed term that elapses.
Beware fees
Borrowers should watch out for expensive fees associated with super low rate mortgages, as it is often cheaper to take a higher rate with a lower, or no, fee.
You can compare the true cost of different deals using our mortgage calculator.
Matt Coulson, director at Heron Financial, says: ‘We are recommending to clients who are within six months of the end of their mortgage to consider locking in a rate now.
‘Especially if your broker doesn’t charge fees, there’s no harm in securing an interest rate now without an obligation to complete on that in case they reduce again – a broker could potentially find you a better option within the next few months.’
The state of rates: As it stands
Of the sub-1 per cent mortgage deals now available, many are restricted in terms of the borrowers than can access them, and all the five-year fixes below that level have gone.
The vast majority of sub-1 per cent new mortgages are only open to those who have deposits of at least 40 per cent.
Two are restricted to those who have Lloyds Bank current accounts, and five have minimum loan amounts of at least £250,000, according to Defaqto.
Another is restricted to those living in certain postcodes in Lancashire.
Thirteen are available for remortgages and the remaining nine are for purchase only.
Only two loans, with Ulster Bank, are on a five-year fix and the rest are two-year.
For those who need a 5-year fixed product and have a deposit of 40 per cent or more, the best rate available has increased from 0.99 per cent to 1.09 per cent.
As well as the lowest rates on the market being tipped over the 1 per cent marker, rates are also rising for those with smaller deposits.
The best rate for a 5-year fixed product for someone with a 30 per cent deposit is now 1.19 per cent, up from 1.04 per cent last week.
First-time buyer rates have also been affected. Last week the average rate for a 2-year fixed first time buyer mortgage with a 5 per cent deposit was 2.45 per cent but this has jumped in a week to 2.69 per cent.
This, Defaqto said, would add around £24 to a monthly repayment for someone with a mortgage of £200,000.
Article sourced from This is Money on 4th November 2021. Original full article can be viewed by clicking link below
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Mc Daid Mortgages do not accept responsibility for any advice provided or opinions expressed with this article. This is for information purposes only
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