INTEREST ON FIXED RATE MORTGAGE DEALS FALLS

The average cost of a fixed rate mortgage is on its way down, with some high street lenders reducing their deals by 0.75%

 

The average cost of a fixed rate mortgage has fallen despite the recent interest rate hike.
The typical rate charged on a two-year fixed rate deal has dropped by 0.11% during the past week, to stand at 6.35%.
Interest charged on five-year deals has fallen even further, declining by 0.18% to average 6.12%, according to financial information group Moneyfacts.
Some lenders reduced the cost of their fixed rate deals by even more, with Britain’s biggest mortgage lender Halifax cutting its fixed rate deals by up to 0.24%, while Barclays has reduced its rates by up to 0.4%.
Natwest and Royal Bank of Scotland have both knocked up to 0.75% off the cost of some of their fixed rate products.
The decreases come despite the fact the Bank of England’s Monetary Policy Committee (MPC) increased the Bank Rate by 0.75% in early November – the biggest single day increase for more than three-decades.
The reductions suggest the cost of fixed rate mortgages may already have peaked, despite the fact that the Bank Rate may increase further.

Why is this happening?

The average cost of fixed rate mortgages soared to a 14-year high in the wake of former Chancellor Kwasi Kwarteng’s mini-Budget.
The unfunded tax cuts and spending increases announced by Kwarteng caused markets to lose confidence in the UK government, which led to steep increases in gilt yields – the rate at which the government borrows money.
The cost of fixed rate mortgages is based on swap rates, which are in turn based on gilt yields.
As a result, when gilt yields rose, so did the cost of fixed rate mortgages.
Gilt yields started to edge back down again after new Chancellor Jeremy Hunt reversed nearly all of the measures Kwarteng announced, helping to restore market confidence.
They fell further following the appointment of new Prime Minister Rishi Sunak.
As gilt yields have come down, so has the cost of fixed rate mortgages, despite the fact that the Bank Rate has increased.

What about variable rate mortgages?

Unlike fixed rate mortgages, interest charged on variable rate mortgages moves up and down in line with changes to the Bank Rate.

As a result, following November’s interest rate rise, the cost of variable rate deals has increased.

But there is some good news, as lenders do not appear to be passing on the increase in full to new mortgage customers.

For example, the average cost of a two-year tracker mortgage has risen by only 0.43%, to stand at 4.12%, since interest rates were raised by 0.75%.

What should I do now?

The current situation in the mortgage market is very fluid, which makes it difficult for people coming to the end of a deal to know what to do.
On the one hand, the cost of fixed rate mortgages is currently coming down, and may well drop further during the final part of the year.
But on the other hand, the Monetary Policy Committee may raise interest rates again at its December meeting.
In its most recent meeting, it warned that it would “respond forcefully, as necessary” to get inflation back down to its 2% target.
But in a press conference following the meeting, Bank Governor Andrew Bailey also said the Bank Rate would have to go up by less than currently expected by financial markets.
His comments have led economists to predict that the Bank Rate could peak at between 3% to 4%, meaning it may not rise much further from its current level of 3%, although some commentators still predict it will have to rise to 5%.
If the Bank Rate does not rise by much more, tracker mortgages currently look good value.
The average tracker rate is 4.12%, meaning it would increase to 5.12% if the Bank Rate rises to 4%, and 6.12% if it rises to 5%, as tracker products automatically move up and down in line with changes to the Bank Rate.
But some borrowers may prefer the security offered by a fixed rate deal.
At an average of 6.35% for a two-year product and 6.12% for a five-year one, they would not be paying much more for this security if the Bank Rate does rise to 5%.
Given the high level of uncertainty in the market, it may be a good idea to use a mortgage broker to talk you through the pros and cons of various products and help you find the deal that is best for you.

Key takeaways

  • Natwest and Royal Bank of Scotland have reduced their fixed rate deals by up to 0.75%
  • Britain’s biggest mortgage lender Halifax has cut its fixed rate deals by 0.24%, while Barclays has reduced its rates by up to 0.4%.
  • The typical rate charged on a two-year fixed rate deal has now dropped by 0.11% to 6.35%, while five-year deals are down 0.18% to 6.12%