Story for The Times: Mortgage borrower behaviour in base rate week

As we've come into 2023 and fixed rates have seen reductions across the board, tracker rates are no longer enticing as many of our clients as they were pre-Christmas. We believe this is down to profit margins on fixed rates appearing as though there isn't much more room for improvement, whilst there still being plenty of media content around the Bank of England base rate having further increases applied to it over the coming months.
What happens for the remainder of the quarter will be mostly down to the MPC meet on Thursday and whether they hold the base rate or not.

We have had a really busy January, but the mindset of buyers has now shifted from last year. We were seeing many buyers last Summer panicking and rushing in with high offers due to bidding wars - now we are seeing buyers going in calm and prepared with confident offers, which is great to see - as it makes the whole process much less stressful for them. Lenders are still reducing rates, and this can be confusing for them when the news are reporting a looming base rate increase. So we have spent a lot of time educating our clients on how mortgages are priced, and this supports them in their decision making when assessing their needs. Trackers were becoming very popular however we have now started to see fixed rates becoming the favourite again as the rates have reduced - which I believe we will continue to see over the coming weeks.

There seems to have been a switch a few weeks ago when lenders started decreasing fixed-rate mortgages. Borrowers are now coming to terms that fixed rates, although slightly higher than tracker products, are better for them - depending on circumstances. Where tracker rates were much more appealing, lenders have now entered a fixed-rate competition. We are now seeing fixed rates decrease every week which is good news for borrowers. There may be another base rate increase to 4.0%, and if there is, it is expected not to increase further which is great for borrowers.

During the last few weeks, many first time buyers have come back from hiding. They are not more interested in buying a home, especially as property prices drop slightly, coupled with lower fixed-rate deals compared to October 2022 when we were seeing 6%+.

Good advice is coming to the forefront in these trying times as we are exploring more options for clients. In the last few years you'd maybe consider a tracker but more often than not clients would be wanting to just see what a fixed rate looked like. Now we are exploring fixed, tracker and DVRs for clients and the advice around this being really valuable. Where a month or so ago more clients were turning to trackers especially those with No ERCs i am finding more clients opting for fixed rates again in order to buy themselves some security and with these rates being close to tracker rates now. Each situation is unique though, if buying at 90% perhaps a 5 year fixed is the best option to ride any downturn in prices, perhaps a 2 year fixed for someone that needs certainty but isn't familiar with the area they will live

There is a lot of confusion from mortgage holders on how a fixed-rate mortgage is priced. We are seeing a lot of concern and clients wanting urgency in fear that the new fixed-rate mortgage may become more expensive should the base rate increase again on Thursday. Therefore, we are spending a huge amount of time educating each of our clients on how this works to take away their worries.

With fixed rates having come down over the past weeks, whilst the base rate has increased, the margin between variable rates and fixed rates has narrowed. With the expectation for further increases in base rate this year, the pendulum does seem to be swinging back towards fixed rates for many borrowers.

In commercial mortgages we see calmer clients approaching rates with a view on where they expect the current rate-raising cycle to get to, that view commonly reflecting press reports of the markets in interest rate swaps and government bond yields, and a lower rate peak than in Q4 2022.
Where clients comment that the premium attached to fixed terms is excessive compared to their rate expectations, we are seeing some shift back to variable rates - something that was off the table for many businesses for much of the last quarter.

The mini-budget-induced spike in mortgage rates and relative 'saving' offered by tracker/discount rates (compared to fixes), certainly led to greater customer interest in variable mortgage products. However, uptake hasn't spiked as drastically. This is likely because, as the cost of living continues upward, most clients ironically cannot afford to risk their rate rising beyond fixed rate levels. Fast forward to today, there is only around 0.5% difference between BOE tracker rates and fixes and only 1% between (lender-controlled) discount rates. Today, the risk of a variable rate, less justifies the reward than it did last year and customer buying habits reflect this. If fixed rates continue dropping at such pace, I believe we should see the first sub-4% mortgage fixed rate within the next 2 months. Fixes still rule for the foreseeable.

Clients are still expressing 'rate shock' when they come to fix. Especially where their circumstances mean they are restricted in the choice of lenders. They've seen rate quotes of 4.2% in the press so are naturally disappointed when they can only fix at 5.44%.

As a consequence, our clients are far more open to discount and tracker rate mortgages than they were.

The thing to remember about low fixed rate products, is that they often have a £1495 arrangement fee, and also require a 25% or 40% deposit.

January’s mortgage market is not seeing the panic of the October market, even though the base rate has doubled over the four month period.

Tracker rates are proving popular with homeowners as they can still be 1% lower than the equivalent two-year fixed rate. With some Lenders offering a later switch from a tracker to a fixed rate without penalty, this is a good option for some.

A number of the larger lenders have opened the window for existing borrowers to secure a new rate six months ahead expiry of their current rate. This has lead to the ‘changing horses’ mid race scenario where the borrower secures a rate today and reviews it monthly, moving to a lower rate if one becomes available.

Thankfully, rates have come down dramatically in the last 3 months. 90% of our clients at one point were taking tracker rates which were sometimes 2% or more cheaper than fixed rates. Due to aggressive lender pricing, we are now seeing 50% opting to fix the rate as the difference between tracker rates narrows. When factoring in another likely 0.5% base rate increase, borrowers are more inclined to fix now for peace of mind but that could all change again if the base rate was to increase by 0.25%.

Trackers are still packing a punch with the majority of our borrowers currently. The gulf in rate available between those and their fixed counterparts is just too tempting.

As fixed rates calm, some borrowers will pay for the certainty they bring, but there's definitely been a mindset shift in the openness to trackers that's here to stay for a while yet.

The popularity of tracker rates lasted as long as Ladbaby at Christmas number 1. Both are a novelty, the reality is that the tracker rates gap stands at 08%-1% meaning the predicted base rate rise to 4.5% will see the tracker rates the same if not slightly more expensive than the fixed rates, and with everything still rising and expensive customers are now heading back to the security of the fixed rates, bit like an Ed Sheeran Single, the safe option and know also going to have a hit.

With inflation forecasted to be less than 1% at some point in 2024, the bank of england will have no option to reduce the base rate, whether they go as low as 1% or get to the magic number of 2.5% is certainly going to intriguing, but this naturally sound lower the interest rates and that is what everyone is now banking on.

We are finding that more clients are now considering fixed rates again as the margin between trackers and fixed rates has been reduced in the new year, largely due to the base rate rises in quarter 4 of 2022 pushing up tracker products, coupled with the cooling down of swap rates and increased lender competition to start the year has lead to decreased pricing of fixed products available in the market place.
Lender product development has also lead to some lenders diversifying their offering by bringing out switch and fix products or no ERC trackers, which are also proving popular, as they make it prudent for clients to switch to fixed rates when it is viable to do so, or the margin afforded by the tracker is no longer worth the risk of future base rate rises and clients then look to make the switch and lock in a long term fix.

Do I fix or do I opt for a tracker, well it all depends on your attitude to risk and your circumstances. The majority of applications at the back end of 2022 were for tracker mortgages as they were the cheapest option. As fixed rates are now decreasing and will most likely continue to be competitive they are proving to be popular once again. The thing to remember is with fixed rates you have certainty on the monthly mortgage payments during the fixed rate period, whilst with trackers, the rates will either increase or decrease with the BoE base rate. For first-time buyers, a fixed rate would be a better option to help in the early years with household budgeting.

I don't think increasing the base rate is the right answer to curbing inflation. People are spending money on essentials, not luxuries.

The irony of seeing a bigger take up of variable rates than ever before, at a time when base rate is (soon to be) at a 14 year high is an experiment in human behaviour. It's the opposite to recent months frenzied demand for long term certainty with 5+ year fixed rates, often being taken at the height of the market. The media hysteria driving borrowers decision making has been replaced by the pragmatic advice of financial professionals. Banks expectations of market performance is in line, and so these institutions have confidence to be increasingly competitive in their pricing. The gap between tracker and fixed rates has closed, swap rates are falling below 4% and we'll probably see a return to 2 year fixed rates as the rate of choice to most.