Fixed-rate mortgage or tracker? How to tackle rising interest rates


Hundreds of thousands of borrowers on tracker mortgages will see an immediate increase in their mortgage bills, following the Bank of England's decision to increase interest rates to 4pc this week.

Many households have opted for the deals, which track central interest rates, as fixed-deals have become more expensive.

But now, fixed-rate mortgages are falling in cost and soon it will make more sense for many to lock in, giving families the chance to cap soaring bills.

Experts have said fixed-price deals will fall below trackers in price as soon as March.

Trackers were priced significantly lower than the average fixed-rate mortgage during the economic fallout which followed the mini-Budget last year.

When mortgage rates peaked in mid-November last year the average two-year fix was priced at 6.65pc, while the average two-year tracker rate was 3.77pc – an interest saving of £360 each month on a £150,000 loan.

But savings have shrunk as fixed rates have steadily fallen and the cost of trackers rose in line with the Bank Rate, which the Bank of England this week increased by 0.5 percentage points to 4pc. The rise will be passed on almost immediately to borrowers on tracker and variable rate mortgages.

Graham Cox of Self Employed Mortgage Hub, a broker, said: “The difference between fixed-rate deals and trackers has fallen markedly in recent weeks, to the point where a lot of trackers aren't worth the gamble.”

On Thursday, the average two-year fixed rate was 5.44pc, according to analyst Moneyfacts, and the typical two-year tracker priced at 4.39pc. A borrower with a £200,000 loan could save £175 a month in interest by opting for the tracker.

But the cost of a tracker will rise further in the coming days as lenders feed through the Bank of England rise. If the average tracker rate rose by the full 0.5 percentage point increase, to 4.89pc, the saving on the same loan would shrink to £83 a month.

For many, this saving will no longer outweigh the potential risks of a tracker deal. There is no ceiling on how high repayments could rise and their volatile nature means tracker mortgages are not appropriate for households that prize certainty over savings.

Hannah Bashford, of broker Model Financial Solutions, said: “Clients who had chosen tracker rates before Christmas are now re-visiting their options, because the gap between trackers and fixed rates has shrunk, especially for people with a bigger deposit.

“The general consensus from our clients is that they would like security of a fixed rate for the next couple of years.”

When should I lock in a fixed rate?

The general consensus among experts is that fixed rates are still overpriced and have further to fall, despite more increases to the Bank Rate in the pipeline.

This is because rates on fixed mortgages are dictated not just by the Bank Rate, but also by expectations of future borrowing costs – these are reflected by what are known as swap rates.

There is an escalating price war between lenders who are competing for business to hit new lending targets this year. The average two-year fixed rate has fallen from 5.79pc to 5.44pc since the beginning of January, while the typical five-year rate has dropped from 5.63pc to 5.20pc, according to Moneyfacts.

The cheapest deals have fallen even further and analysts and brokers now expect the best fixed rates to drop below 4pc in the coming weeks.

Capital Economics has forecast the average two-year fixed rate will be on par with the average tracker rate at 5pc by the beginning of March. It expects the typical tracker rate to keep rising and reach 5.5pc for the remainder of this year, while the average two-year fixed rate dips below 5pc.

Craig Fish, of Lodestone Mortgages & Protection, said: “The crossover point is almost upon us and there are busy times ahead.”

How long should I fix for?

The cost of borrowing this year will remain inflated despite interest rate falls, serving as a shock for households coming off rates fixed two or five years ago. More than 1.4 million borrowers will pay higher rates this year as their fixed deal comes to an end, according to figures published by the Office for National Statistics.

Andrew Wishart, of Capital Economics, said: “Our forecast that the Bank of England will raise rates to 4.5pc in March and keep them there until the end of the year means swap rates are unlikely to fall significantly this year.

“After the Bank of England starts cutting interest rates, however, we expect a more significant decline.”

The average mortgage rate will ease to 4.7pc by the end of the year, according to Capital Economics, but the biggest falls will come in 2024 and 2025 – when the average rate is expected to drop to 4pc and 3.4pc respectively.

Brokers suggest the typical borrower should fix for two years and make the most of lower rates in 2025, although how long each household fixes will depend on their individual financial circumstances.

Mr Fish said: “Once fixed rates become cheaper than trackers we will shift our attention to two-year fixes, so that clients aren’t paying over the odds for the next five years.”

Samuel Mather-Holgate, of broker Mather and Murray Financial, said: “The longer you fix for, with rates where they currently are, the longer you lock in potential losses for.

“As a middle option, fixing for two years will be roughly cost neutral as rates go over the hump and you can then reassess after 24 months.”

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