The Big Mortgage Conundrum: Is tracker or fixed best in 2023?
7 July, 2023
Back in October 2022, market experts predicted interest rates would be up at 5.5% by July 2023, but with the cheapest fixed rate deals at around 3.75% then, this felt a long time in the future and certainly not a pressing concern. Fast forward to summer 2023 and now, shortly after the Bank of England’s 13th consecutive rate rise, with the base rate now standing at 5%, we are in a position where things are looking much more desperate for many mortgage holders.
We spoke to David Hollingworth from London & Country Mortgages (L&C), as well as our very own Founder and CEO Holly Mackay, to see what the best course of action is if you are coming up for a remortgage any time soon.
What is going on with interest rates?
Think tank The Resolution Foundation recently suggested the two-year fixed rate deal will hit 6.25% later this year, leaving the UK in a "mortgage crunch". It is thought that for around 800,000 people looking to remortgage, they will have to pay on average nearly £3,000 more a year when they come to get new deals. Some of these people would have had their previous deals fixed in at around 0.85% and 1% respectively so all in all, quite a shock to wallets.
Mortgage rates have proved a rollercoaster ride in the last 12 months. Only a few months ago there was hope we were nearing the peak for Bank of England base rate, only to see stubborn inflation figures cause a rethink.
What to do if you need to remortgage soon?
If you have a fixed rate mortgage
If you are on a fixed rate, and that isn’t due to finish for a good while yet, you are likely insulated from any steep rise in payments over the short and/or mid-term.
If however, your fixed-term mortgage is coming to an end in the next 6 months, you're able to apply and arrange a new mortgage today, and can arrange for this to kick in when your current deal ends. If this is you, and you know you want another fixed rate deal, then don’t hang about, get on the phone or online sooner rather than later.
More customers are rushing to grab a fixed rate before they climb higher and will often start the search up to 6 months before their deal ends. They are often opting to lock in for 2 years rather than 5 years, a distinct turnaround from recent years.
Many will be hoping that interest rates will come back down in the next couple of years, meaning that they can review their deal and hopefully pick up a cheaper rate. Locking in for 5 years could save money now, but borrowers are clearly concerned about being tied into a higher rate over the longer run.
What are the benefits of locking in your mortgage for longer?
First, you get protection against long-term and ongoing interest rate hikes. If you believe that rates are just going to keep on rising, this could make sense. It also gives you certainty and peace of mind about what your monthly outgoings will be. This path will also see you typically pay less in arrangement fees. These fees can be hefty and it’s not unusual to see an arrangement fee of over £1,000.
Mortgage rates have been affected by the expectation of a need for more rate increases to tame inflation, which have fed through to mortgage rates, especially fixed rate deals which have leapt in price. However, there’s still hope that inflation will come down over time which could see interest rates ease back. That market expectation is demonstrated through the fact that longer term fixed rates are lower than those on shorter term fixed deals.
What are the disadvantages of locking in your mortgage for longer?
The longer-term fixes often require a large deposit, so may be out of reach for first-time buyers or those maxed out on their mortgages. Also, if you only have a deposit of, say, 15% then the rates for both tracker and fixed mortgages will often be higher. In general - the more you borrow relative to your salary and downpayment, the higher the rates as there is a higher uncertainty that you’ll be able to afford your repayments.
Do check the portability of mortgages – the longer the term, the more likely it is you will want to move during the term of the mortgage, so make sure that any barriers to this are not insurmountable for you. There’s also the unavoidable truth that it's very hard to call interest rates over the long-term – if interest rates fall, then you might be locked in to a needlessly high rate for a very long time. With early penalties to pay if you want to escape.
There are no guarantees of course and it’s difficult to second guess what may or may not happen to rates. There’s certainly no expectation of a return to the recent historic lows even if rates do fall again. Borrowers currently seem to be looking for something that will give them some certainty of payment now but also allow for a chance to reassess in a couple of years. Ultimately, it’s important to stay focused on what will make you feel more comfortable, at a time when many will inevitably see some substantial hikes in mortgage payments.
If you have a tracker mortgage
Given the recent base rate increase and the potential for more to come, fewer borrowers are looking at tracker rates, and those who do must brace themselves for potentially higher monthly payments if rates rise further, even if they could ultimately fall back again.
These mortgages are pegged to the ‘base rate’ which is set by the Bank of England. We know that we’re in a rising rate environment, which means a world of pain for people on trackers. Every £100,000 of a mortgage for someone with a 25-year mortgage is likely to cost about £614 a month at the 5.5% rate, and the rate may be around 3% higher for those on trackers.
Standard variable rates are the ugly world you find yourself in when your fix comes to an end and your provider slings you into the Dear Loyal Customer rip-off pot! The only real benefit of this scenario is that there are no penalties for an exit, so if you're selling your property for example, they give you the convenience you need for the price of a hefty interest rate.
Fixed vs tracker mortgage in 2023: Which is best?
Although we all know some smug person who claims to have fixed in a mega low rate that lasts forever (!), no-one has a crystal ball, and it’s difficult to know whether to cancel a mortgage and rush to a fix before rates go up again.
The big question is what's going to happen to rates in the next half of this year? This largely depends on inflation and although the Bank of England – and, indeed, the world – is trying its level best to get it under control there is no proof it is slowing fast enough. Two factors are super material here: What will happen in the next phase of the war in Ukraine and with Russia? And will we be in a painful world recession?
The theory usually holds that interest rates get cut in a recession because we’re all naturally spending less anyway, so inflation falls. And things grind to a halt. Many actually think we'll be in a deflationary environment next year, in which case rates will fall, and the fixed rates on offer next year could be cheaper than they are today.
Holly Mackay's view
It costs nothing other than irritation, boredom with form filling and occasional admin rage to get a mortgage offer. Often giving you 6 months to decide whether to take it up or not. So it's an exercise worth doing. Don't forget to explore your early repayment charges. How material are they? This is a huge factor in your decision. And speak to a mortgage broker. I wouldn’t rely on a comparison site, as they may not have all the deals. Find out all your options.
If you're looking for professional guidance, head over to our Adviser Directory to speak to a qualified adviser who can help you determine the best course of action for you. Tech challengers Habito have a decent online journey or L&C are an established well-respected adviser you might want to check out.
Finally - and this is just a personal opinion, not gospel - I think it’s a very odd time in markets where most things are behaving in a very volatile manner. I don’t think this is the time to fix things in for very long timeframes, because I think we could be in a very different environment this time next year. And it’s hard enough working out what that looks like, let alone what 5 years+ down the track looks like.
I suspect that a 2-year fix offers some certainty and protection today, without locking you into a rate which could look pretty toppy in 12 months’ time. But, as always, this is a personal decision, depending on early repayment charges, various arrangement fees, where you are in the mortgage cycle – and how much peace of mind and certainty matters to you.
Top 3 mortgage must-dos
1. Take action
With plenty of volatility in the mortgage market at the moment it would be easy to be confused, to the point of potentially doing nothing. That could prove expensive though as drifting onto a lender’s standard variable rate (SVR) is unlikely to be the right thing to do. The SVR is likely to be higher than fixed rates and tracker deals so could be pricey as a holding position.
2. Don’t forget the fees
It’s easy to focus on the rate especially when interest rates have been climbing and it is of course a hugely important part of any deal. However, there are other elements to think about too that could affect the overall value of a deal.
The lowest rates can carry arrangement fees of around £1,000 or more in some cases and could charge for a valuation fee. Other deals may offer a slightly higher rate but a lower fee and other incentives such as a free valuation and cashback or free basic legal work for remortgages.
3. Take advice
In a fast-moving market it’s likely that advice will only be more important. There are still thousands of deals on the market but they can come and go quickly, often with little or no notice. It’s also important to make sure that you select the right lender, so that the criteria fit your individual circumstances.
You should make sure that your adviser will be looking at lenders across the market, not just a limited panel. Also consider the fees, as some brokers will not charge any broker fee whereas others may charge as well as taking any commission from the lender. Your adviser should always run through costs, how they work and the service they offer.
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