The recent cut in interest rates by the Bank of England is some much-needed good news for homeowners and prospective house buyers. However, it raises many questions around the type of mortgage to opt for, whether to act now or hold off for possibly better deals. Here are some insights and advice that can help one navigate through these changes.

Last week the Bank of England cut interest rates for the first time since 2020. Good for the millions of people who had a mortgage, were looking to buy a house, but raised many questions and decisions.

Do I go for a fixed rate or tracker mortgage?

One may wonder whether to choose a fixed-rate or tracker mortgage while buying a home. The good thing about these choices is that all of them are beneficial:

Fixed Rate Mortgage – Your payment in a fixed-rate mortgage doesn’t change, so it works really well if your budget is tight. This is the reason most first-time buyers find that fixed rates benefit them. At present, fixed rates are also lower than trackers.
Tracker Mortgage: This type of mortgage reflects the base rate of the Bank of England. When the rates of interest are cut, your payments will also go down. Many experts believe that there are going to be more rate cuts this year, hence making trackers very lucrative.
According to David Hollingworth from L&C Mortgages, most people still prefer fixed rates, owing to the fact that they have stable payments and, at the moment, are a bit cheaper.

Are the Fixed Rates Getting Cheaper?

Yes, there are. Moving up again, five-year fixed-rate house purchase mortgages with rates below 4% have reappeared. Nationwide has a five-year fixed-rate deal at 3.99% for people borrowing up to 60% of the property’s value. Virgin Money, with a 10% deposit, offers a five-year fix at 4.76%. Halifax, meanwhile, has a five-year deal, even with just a 5% deposit, at 5.23%.

Some may consider holding out, hoping for a further fall in rates. While it is expected that fixed rates will continue to fall slowly, Andrew Montlake from Coreco says that there should not be an expectation of a sudden dramatic fall. Waiting can be dangerous because if house prices rise further during that time, all the savings one might achieve from reduced mortgage costs could be lost.

Rohit Kohli, of The Mortgage Stop, says people should take action as soon as possible because rising demand could push house prices up even further, making it that bit harder to buy a home at a later date.

What if my current mortgage deal is ending?

Some 700,000 people in the UK have fixed-rate mortgages ending between July and December 2024. For most the direction of travel is for higher monthly repayments when that current deal ends.

The average new five-year fixed-rate mortgage is now 5.38%, well above the 2.84% average rate in August 2019. Though that is lower than the 6.32% average rate in November 2022.

Should I lock in a new mortgage now?

If your mortgage deal is ending within the next few months, you can protect a new loan now. Mortgage offers are generally valid for up to six months. This way, if rates go down, you can switch to a cheaper deal. If they go up, you would have already locked in a lower rate.

Is It Okay to Stay on the Standard Variable Rate (SVR)?

How much could you move on to your lender’s SVR if you don’t get a new deal when your current deal has finished, and how could the average SVR is high at 8.16%? Some current SVRs have rates. It could be very costly if you remain on an SVR.

Most experts would advise you not to remain on the SVR for too long. Only under some specific circumstances, such as when you are getting towards the end of your mortgage or the outstanding balance is really very small, it could make sense.

What’s Better Than an SVR?

You could, however, move to a tracker mortgage which does not have any early repayment charges if you believe fixed rates are on the point of falling. This will mean that you will be in a position to move to a more competitive fixed rate if and when interest rates do fall, without penalties.

For example, Barclays is offering a two-year tracker with no ERCs at 5.15% for those borrowing up to 60%. Factor in any arrangement fees when working out the cost.

The recent reduction in interest rate will be an opportunity for homebuyers or coming-to-an-end mortgage-holders, though circumstances and the market will dictate whether to go fixed or tracker and when to act. As usual be sure to check out all options and do speak to the mortgage brokers.