What's in store for mortgages next year? MSE speaks to six experts to find out whether you should fix or not
Rising rates have dominated mortgage headlines this year, with both fixed rate and variable deals becoming more expensive. To try to provide clarity on what you can expect, we have spoken to mortgage experts and financial market analysts to see what they think is in store for 2023.
The consensus is that rates on fixed mortgages will fall next year and that tracker mortgages could present a good medium-term solution for borrowers waiting to see where the market is headed in 2023. The full set of questions and answers are below.
If you need to speak with a mortgage broker, see our Cheap mortgage finding guide for top tips. Also see our recent news stories on whether you should Ditch a secured rate that hasn't started and why Product transfers should be a serious consideration.
The information below represents the general views of brokers and analysts, and should not be seen as individual advice.
In summary – what the brokers said
- Rates on fixed mortgage deals should come down in 2023 – albeit modestly
- Tracker mortgages could present a good solution for some borrowers
- Over time the gap in cost between trackers and fixes will likely narrow
- It's hard to say whether now is a 'good' time to fix your mortgage
- How long to fix for depends on your personal circumstances
Interest rates on fixed mortgages have shot up dramatically over the past 12 months. Average rates on a two-year fix recently dipped back below 6%, though this is still far higher than average rates of 2.34% a year ago.
So where do brokers believe rates on fixed mortgages could be heading as we enter 2023?
David Hollingworth, L&C: "There are increasing signs that lenders are now starting to compete harder, and consequently fixed rates are beginning to fall. Top rates have dipped well below 5% and are edging closer to 4.5%. With swap rates down and a quieter market, we could soon find ourselves in the midst of a price war as lenders look to attract borrowers who are eager to pin down their biggest outgoing and defend against the higher cost of living."
Simon Butler, CMME: "Fixed-rate pricing has been reducing considerably over the past month as lender confidence returns. The pricing of swap rates has been on a downward trend for a while now and five and 10-year fixed pricing has particularly dropped. All the signs are that this will continue next year. Most experts expect the base rate to settle around 4% to 4.5% by the end of 2023 and top fixed mortgage deals to fall to just under 4% within 18 months."
Sam Amidi, Better.co.uk (formerly Trussle): "As the Bank of England base rate increase has been reasonably severe, we are hopeful that fixed mortgage rates could fall to around 4% by the end of March 2023 – provided there isn't another mini-budget-type scenario."
Sarah Coles, Hargreaves Lansdown: "If life goes as the markets are expecting, after the peak in early 2023 the base rate will drop gradually back to much lower levels. The recession will suck demand out of the economy, bringing inflation down, and encouraging the Bank of England to ease rates further. These rate expectations will feed through into mortgage rates through 2023. Average fixed rates might fall back below 5% by the end of the year, with the best rates closer to 4%. Of course, there are no guarantees when it comes to the mortgage market, because so much depends on the wider world."
Variable rate mortgages, like trackers and discount deals, are growing in demand as rates on these are far better than those on fixes. For example, the best rate you can get on a two-year tracker is currently 3.25% compared to 4.85% on a two-year fix.
According to Ray Boulger, while fixed-rate deals made up 95% of new mortgages until recently, this figure is expected to drop to around 75% in 2023.
See our What mortgage to choose guide for a full run-down of how fixed and variable deals compare. But in the meantime, here's what brokers say about variable deals:
Aaron Strutt, Trinity Financial: "Tracker rate mortgages and discounted variable deals have been popular because they are so much cheaper than the fixes. However, if they increase in line with the Bank of England base rate rising and fixed rates get cheaper, then variables may not be such an attractive option. The trick is to find a 'switch to fix' tracker which allow borrowers to move onto a fixed rate at any point without paying huge early repayment fees."
David: "Now that we are returning to a higher rate environment, borrowers are once again faced with the traditional dilemma of whether rates might not climb as far – therefore the differential between a lower, but fluctuating, tracker rate and a corresponding fixed rate could be worth paying. Rather than lock into the higher fixed rates since the mini-budget, more borrowers have decided that they are prepared to accept the potential rise in a tracker deal on the basis that rate expectations have eased.
"Trackers are also more likely to be free of early repayment charges, allowing borrowers the chance to jump out at a later date, whether that be because fixed rates look more attractive or that rates carry on rising and borrowers want to lock in."
Sam: "Around 70% of our tracker customers took out their mortgages without an early repayment charge. This enables them to potentially look at remortgaging next year as fixed rates become more attractive."
Tracker mortgages typically last for two years, though there's nothing stopping you getting a new one once your current one ends. But will tracker mortgages remain good value in the longer-term?
Simon: "We are seeing an influx of variable rates without early repayment charges to switch at present. This benefits borrowers looking for the lowest current interest rates but with the option to secure a fixed rate if margins become more favourable in this area at a later date.
"We're expecting lenders to lean on flexible products for this reason, but it's key to take note that the Bank of England will likely increase the base rate over at least the next 12 months – so this potential additional margin needs to be factored into the cost of these products."
Ray Boulger, John Charcol: "The gap between the best tracker/ discount rates and the best fixed rates will continue to narrow in the new year, with further increases in the former as the Bank of England base rate rises and continued modest decreases in the latter. By spring, I expect rates on both types of mortgage to be at similar levels – around 4.5% for loan-to-values up to 75%.
"The fact that many trackers offer the benefit of no early repayment charges, which is particularly useful for those planning on moving home, will be important for some borrowers, whereas for others the benefit a fixed rate offers for budgeting will have more value."
With interest rates far higher than they were a year ago, but the cost of fixed mortgages expected to edge down over time, now is arguably not the ideal time to fix a mortgage. Yet the certainty derived from taking a fix is an important factor for many people.
Aaron: "I don't think many people would say it is a great time to take a fixed rate. However, if you have a small mortgage or you think rates are going to go up then there are some reasonable deals available now."
David: "Anyone rapidly approaching the end of their current deal will need to take some action to avoid rolling onto a standard variable rate (SVR). The base rate rises are feeding through into SVRs and so many are now at 6.5% or more, so a bigger margin is building between those and what could be available on a fixed or tracker rate.
"Those starting their search with six months or more remaining on their current rate may feel that they can wait and watch, but again the time for action will come and it could make more sense to secure a good deal now. Although rates are higher than those available last year, they have improved since the mini budget and many borrowers will be craving the budgeting certainty that the currently lower variable deals can't offer."
When interest rates were at ultra-lows, the vast majority of homeowners decided to fix their mortgage – and fix for longer. But with interest rates much higher now than they were, if you do want to fix, how long should you lock in for?
Ray: "Some people will always prefer the greater certainty offered by a longer term fix and there is always the risk of another economic shock which pushes interest rates higher. However, the strong current expectation of the Bank of England and most economists is that in two years' time inflation and interest rates will be lower. So I would favour taking a two-year fix now, with a reasonable expectation of being able to consider switching to a longer term fixed rate in another two years.
"Yet I would also delay locking into a fix now for as long as possible as fixed rates are still falling, despite Thursday’s expected increase in the base rate."
David: "Borrowers face the unusual situation where shorter-term fixes are at higher rates than longer-term deals. That is due to the market anticipating interest rates could fall back again in future once the spike in inflation eases. This could mean that better rates might be on offer in future, but there are a lot of ifs, buts, maybes and – crucially – no guarantees.
"I'd expect that many will be considering the medium term option of a five-year fixed rate, which should help give peace of mind to get through the current uncertainty. Those happy to commit to ten-year deals could get the lowest rates at the moment but they do need to factor in whether the tie-in of early repayment charges could affect them during that period."
Aaron: "It really depends on your attitude to risk. Lots of people will have taken two-year fixes and wished they had locked into a five-year deal. At the same time, a five-year fix near to 4.5% is much more appealing than the rates we were seeing last month. If it is time to swap deals you can only take the rates that are available at the time."
When you need a new mortgage, you have two options to choose from: getting a new deal from a different lender (known as remortgaging) or getting a new deal from your existing lender (known as a 'product transfer). In the past, remortgaging almost always presented the cheapest options – but this isn't the case any longer.
Ray: "Twenty years ago, when an initial mortgage rate finished it was nearly always necessary to remortgage to obtain another good deal. More recently we've moved into a period where lenders started offering existing borrowers new deals (product transfers) which had the same or similar rates they offered to new customers.
"I expect this trend to accelerate in 2023, partly because with a significant reduction in property transactions likely next year, lenders will need to focus more on remortgages / product transfers to maintain lending volumes."
"There is also some potential for lenders to shift their credit scoring requirement over time. For example, they could impose a higher threshold for borrowers with a small deposit in order to change the profile of borrower they will accept."
Ray: "I don't expect any significant tightening of criteria and so in general it is unlikely to become more difficult to obtain a mortgage than it is now, but as a result of the interest rate increases over the last year the affordability test now reflects higher rates, resulting in a lower maximum loan for some borrowers."
Sam: "Lenders themselves won't make it harder, but the wider economic environment will. Due to the cost of living crisis, we are seeing an increase in customers who have credit history issues. The specialist mortgage market (lenders who are equipped to provide products to people with challenging credit histories, for example) is expanding as a result."
Simon: "It's worth noting that mortgage lenders have, for quite a while now, used a two-step approach to shorter term mortgage rates during an affordability assessment. If an applicant is not scoring positively based on the repayments on a shorter term product many lenders will offer a longer term fixed product with improved affordability scales as a way to proceed."