A homeowner with a £335,000 mortgage has locked into a five-year fixed rate of 5.15 per cent, concerned the decision was hasty even though rates have since stabilised slightly. The borrower, whose current deal ends in December, acted after the best available rates shifted dramatically upwards in recent months.
Early this year, borrowers could find a broad range of remortgage options below 4 per cent, according to analysis by This is Money's mortgage expert David Hollingworth. By the start of October, rates had climbed above 5 per cent. This shift of more than 1 percentage point has been driven by the outbreak of the Iran war and upward pressure on inflation, with financial markets now expecting interest rates to climb. Lenders adjust rates based on what markets forecast will happen, and sentiment has turned more negative. Analysis of the lowest rates from the ten biggest lenders showed that average two and five year fixed rates jumped by 0.4 percentage points or more in September alone.
Although the borrower's rate of 5.15 per cent was competitive at the end of September when most lenders' lowest offers were above 5 per cent with big fees attached, Hollingworth noted that since then, market rates have stabilised somewhat and some lenders have adjusted rates down a little. The key point for borrowers is that even after securing a deal, it is often possible to review the rate before completion without charge, potentially switching to a better product from the same lender or exploring alternatives across the wider market. Over five years, savings of around a thousand pounds could accumulate even from modest rate reductions.
The borrower faces a choice between the certainty of a five-year fixed rate and alternative options. Two-year fixed rates offer slightly lower rates with another chance to review in two or three years, though no guarantee rates won't be similar or higher then. Tracker deals have not increased yet as the base rate has remained steady, with two-year trackers as much as 1 per cent below fixed options. However, trackers would see payments rise as base rate climbs. Hollingworth noted that for a tracker to reach the level of a fixed rate, there would need to be four quarter point increases in base rate.
For UK borrowers with mortgages ending soon, locking in now provides budgeting certainty but locks in higher payments for years, whilst tracker deals offer initially lower payments but with the risk of increases if the base rate rises faster than expected. The decision ultimately depends on individual comfort with payment uncertainty versus rate certainty.