Fixed mortgage deals expected to get cheaper despite base rate increasing to 4% – what you need to know

Fixed mortgage rates have been coming down since the turmoil generated by the mini-budget last September. In November, banks started to offer fixed mortgage deals under 5% again, and rates have dropped even lower since – the best two-year fixed remortgage is now at 4.35% and the cheapest five and 10-year deals at 3.99%. 

Variable rate mortgages, which have been significantly cheaper than fixed deals over the past few months, are now looking far more expensive after the Bank of England raised the base rate again to 4% last Thursday. 

Interest rates on fixed mortgage deals expected to improve further

According to brokers, the downward trajectory of fixed-rate mortgages is expected to continue over the coming weeks. 

That's primarily because gilt yields and swap rates – which have the biggest impact on the cost of fixed mortgages – are continuing to fall. In addition, many lenders had already 'priced in' the 0.5 percentage point hike to the base rate earlier this month to the cost of their fixed deals.

HSBC has just launched a five-year remortgage fix at 3.99%, the first five-year fix at sub-4% in months, with some brokers suggesting rates on such fixed deals could eventually drop to 3.8%.

The table below shows how rates on fixed mortgage deals have continually improved since October last year.

The table also shows another interest dynamic at play: that many longer-term fixes are actually cheaper than shorter-term fixes right now.

In normal times, the longer you fix for, the higher the interest rate. This is because the lender is guaranteeing your rate while taking on the risk that rates will rise in future. Yet recently, rates have actually been better the longer you're fixing for – a situation known as an 'inverted yield curve'. Essentially, as lenders only expect this period of higher interest rates to be a short-term issue, they are willing to offer better interest rates on longer-term deals.

Broker Simon Butler of CMME said he expected this to continue to be the case for the time being, with five and 10-year fixes likely to remain more competitive than two-year fixes

Gap between best trackers and fixes has narrowed

Back in October, the top fixed-rate mortgage deals were around double the cost of the keenest trackers: the cheapest two-year fix was circa 5.52%, while the equivalent tracker was around 2.94%.

Now, as the base rate has been hiked three times since then (most tracker mortgages are linked to the base rate), the tide has "started to turn in favour" of fixes, according to Sam Amidi of Better.co.uk. Today's best two-year remortgage tracker stands at 4.14%, compared to 4.35% for a two-year fix (you can compare rates using our Mortgage best buys tool).

This table demonstrates how tracker mortgages have been getting more expensive over the past months:

Despite the premium for fixing being lower, if you'd rather wait before fixing a new mortgage (perhaps you believe rates will continue to come down), it's worth discussing with a broker the possibility of temporarily moving on to a tracker mortgage. Some trackers let you move to a fixed-rate deal, penalty-free, at a time of your choosing, giving extra flexibility.

Ray Boulger of John Charcol said: "The argument for sticking with a tracker is that even though they're likely to be higher than rates available on a new fixes, this is a price worth paying in the expectation of getting a cheaper fix later this year. The downside is that you will eventually need an even cheaper fix rate to make up for having paid more over the next few months." 

Remember that variable rate deals such as trackers come with the risk of your mortgage payments going up during the term of the deal (see more on the Differences between variables and fixes). This is an important factor, especially if you're already near to the top of your budget. 

Many analysts believe the base rate will peak between 4% and 4.5%. If this is the case – and there is no guarantee it is – variable rate deals might not actually get much more expensive.

Why you should still consider a new deal with your existing lender

Where you need a new mortgage deal, you've got two options: switching deal with a new lender (known as 'remortgaging'), or getting a new deal with your existing lender (known as a 'product transfer').

In the past, remortgaging almost always had better rates than product transfers, but this is no longer the case. For the past few months, product transfers have been highly competitive – in some cases, lenders have actually been offering better rates to existing borrowers than new customers. 

This remains the case now, so you should consider product transfer rates as well as remortgage rates. The main differences between products transfers and remortgaging are: 

• Fees are often lower with product transfers. You'll normally have to pay an arrangement fee, but that's often it. Legal fees are uncommon and you're unlikely to be charged a valuation fee (though this can be the case with remortgages too).

• There's not normally an affordability assessment with product transfers, which makes the process quicker. So if you're not borrowing more money, this means you could be accepted for a new rate almost instantly. With remortgaging, as affordability assessments form a key part of the switching process, you might struggle to be accepted with a new lender, particularly if you're on the border of affordability, and the process will normally take longer.

Despite the improved offerings on product transfers, shopping around remains the best course of action. David Hollingworth of L&C said that lenders were likely to soon "sharpen their rates to attract new borrowers, with remortgaging being important to them in a quieter purchase market".

Need a new mortgage? Speaking to a mortgage broker is key

With interest rates on different kinds of mortgage deals currently pulling in different directions, the mortgage landscape is arguably even more complicated than a few months back.

That's why, for those who need a new mortgage deal, speaking to a mortgage broker is vital. As well as advising you about the possible rates you could get, they'll be able to indicate which lenders are more likely to accept you based on your personal circumstances. They'll also be able to advise about whether it's best to remortgage or product transfer.

Read our Cheap mortgage finding guide for more on how to compare mortgage brokers.