Base rate held – but with mortgage rates falling, should you fix now or wait?

Back in May, a spike in interest rates resulted in two and five-year fixed-rate mortgages for first-time buyers hitting 4.82% and 4.45% respectively. But since July, rates on fixes have been edging down, with the equivalent cheapest mortgage deals now at 3.99% and 3.77% respectively.

What's happening with mortgage rates?

Brokers we spoke to identified three key trends:

1. Fixed rates could fall a bit further.

Aaron Strutt, of Trinity Financial, said: "It seems likely that mortgage rates will continue to edge down for a while, especially with Bank of England base rate cuts expected [later this year]. The money markets have been pricing in future base rate reductions, which means they can offer cheaper deals."

David Hollingworth, of broker L&C Mortgages, also said it was possible more lenders would start offering cheaper fixes "if swap rates don't move against them" (mortgages are indirectly linked to swap rates).

Mr Hollingworth added: "The markets have continued to demonstrate more optimism about where the base rate is heading, so we could see the current trend of rate cuts continue."

However, Ray Boulger, of John Charcol, was more cautious, saying he expected a "temporary lull in the downward trend of the most competitive rates".

2. Remortgage deals are lagging behind.

Lenders seem to be "really focused on offering cheaper property purchase rates rather than remortgage rates", Mr Strutt said.

Mr Hollingworth added: "So far we haven’t seen any great push to equalise remortgage rates, but they have followed the purchase rates, plus five-year deals dipping below 4% will have pleased those looking for a new rate."

He also noted that lenders may want to "try and get some business on the books before the end of the year", which could lead to better deals emerging.

3. Five-year fixes are cheapest – for now.

In normal times, interest rates tend to get more expensive the longer you fix your mortgage for. But for the past couple of years, interest rates on five-year fixes have often been cheaper than two year-fixes – with even some 10-year fixes beating two-year deals in recent times.

For now, five-year fixed deals generally remain cheaper than their two-year equivalents. However, this is expected to change, with Mr Boulger predicting that future rate cuts will likely be most generous on two-year deals.

Mr Hollingworth agreed: "Over time, and assuming that base rate does follow the downward path that is expected, we should start to see a shift away from this unusual position where shorter term rates are undercut by longer term options."

As shown above, the short period where 10-year fixes were equivalent to, or not far off, the best two-year fixes seems to have passed. Currently, the cheapest 10-year fixes tend to be 0.5 percentage points higher than the cheapest two-year equivalent, and 1 or more percentage points more expensive than the best five-year fix.

Should I wait to get a new mortgage or switch now? And should I fix or track?

If you're one of the 700,000 homeowners with a mortgage deal ending in the second half of 2024, what to do next is a tricky question to answer. Here are a couple of options if you want some flexibility:

1. Consider temporarily moving on to a tracker mortgage. Some trackers don't have early repayment charges, meaning you could switch to a fixed mortgage penalty-free once you're ready. But all trackers have a variable rate of interest, meaning what you pay can change.
   
   The sticking point is that trackers are substantially more expensive than fixes right now. For example, the top two-year tracker for those looking to remortgage is currently 5.14%, compared to the top two-year fix at 4.14% – equivalent to £57 a month or £680 a year in repayments more per £100,000 owed.
   
   This means you'd need fixed rates to come down a lot to compensate for having been on a higher tracker rate in the meantime. While this gap will probably narrow if the base rate is cut in future months, you'd still need to see a marked improvement in fixed rates for this strategy to work out. So for many it's best to…

2. Arrange a new fix in advance. By locking in a new fix early, not only will you have an insurance against interest rates going up, but you'll also potentially have the flexibility to switch to a cheaper deal, for free, if one launches before your current rate ends (though check this with the lender first). The other advantage is that fixing gives you price certainty.
   
   You can normally lock in a new mortgage deal at least three, and sometimes up to six, months before the end of your current one. We've got full details on the pros and cons of locking in early – including whether you'd be able to ditch a locked-in deal penalty-free – in our Getting ready to remortgage guide.

Ultimately, without a crystal ball there's no way of knowing what will happen with interest rates over the next one, two, five years or longer. So when choosing how long to fix for, consider what's most important to you. The more you value cost certainty, the more you should hedge for a fix (over a tracker) and fix for longer. See our Should I fix my mortgage for five or 10 years? guide.

On your lender's SVR? You can likely save £1,000s with a new deal

A standard variable rate (SVR) is the rate you pay once your current mortgage deal comes to an end. SVRs have a variable rate of interest, which means the rate can change at any time. Not only that, but SVRs are normally far more expensive than the best fixed or tracker deals.

Right now, a typical SVR is around 8%. So if you're on an SVR, including those who have put off switching in the hope interest rates on fixed deals will come down, you should consider locking in a fixed or tracker mortgage now.

Here's how much you'd pay on a typical SVR compared with switching to a fixed or tracker deal:

Remember to check what deals your current lender is offering

When you begin the hunt for a new mortgage, you'll have two options:

1. Getting a new deal from your existing lender (known as a 'product transfer'). Product transfers are typically quicker than remortgaging and often require less paperwork. The rates are very competitive at present and there are typically fewer fees involved compared with remortgaging.

2. Getting a new deal from a different lender entirely (known as 'remortgaging'). Though his process can involve more fees and longer, more thorough checks compared with product transfers.