What will Bank Rate rise mean for mortgage borrowers this year?

Whilst trackers have made a comeback over the past few months, I feel the pendulum is now swinging back towards fixed rates being the favourite. This is due to swap rates reducing and lenders releasing many rate reductions, which now means the margin between tracker and fixed is becoming smaller. With another base rate increase looming, we have had many more clients opt for a fixed rate to cover them from any further increases. Although the prediction is the market will now start to settle many clients still like to know exactly what they are paying each month. How long to fix for is entirely dependant on circumstances but many people are in the same opinion that rates will fall over the next two years, so we are seeing two years being more favourable, as if rates do continue to fall - those locking into a five year won't benefit.

The gap between fixed rates and variables closes further and more is forecast. Our advice to borrowers is to remain level-headed and bring it back to basics. Remember, a mortgage product can have 3 features. It can be flexible, cheap or secure. You can have 2, but never 3! 10-year fixes are cheap and secure right now, but have early repayment charges (ERC) for 10 years. Flexible they are not! An ERC-free mortgage is the most flexible, though more expensive than normal variable rates and by nature, subject to rise at any time. Consider questions like “Is the early repayment charge too long?” “Are the mid-rate overpayments enough?” “Is the security of the fixed rate worth the premium being paid?” "How much would rates need to rise for my mortgage to become unaffordable"? With these answers, you should be better placed to weigh up options.

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. Discount rate mortgages, which are discounted to the lender's standard variable rate, are a different matter. Many are significantly cheaper than the equivalent fix.

How long to fix for is tough to call. I'd say two years is probably prudent but fixing for longer isn't terrible if you can get a decent rate. I don't see the base rate falling much below 3 per cent when inflation is under control, so my expectation is that mortgage rates will remain around 4% for the foreseeable. But the era of ultra-cheap rates is over in my opinion, and house prices will fall sharply in response.

The base rate should go down in the long term. I would stick with a tracker rate now as the difference between this and the 2 or 5-year fixed is significant.

The gap between the fixed and tracker rates is pretty much 0.8%-1%, so if the base rate rises to 4.5% as predicted then the tracker rates will be the same or slightly more expensive than the fixed rates with the majority of lenders. Due to the uncertainty though and the 4.5% still only being a forecast, customers are now opting for the safer fixed option with this being largely 2 years to benefit when hopefully rates drop 2024-2025.
5 year fixed rates are currently only being used for the increased affordability that they offer customers due to the lower stress testing.

Clients that had chosen tracker rates before Christmas are re-visiting their options because the differential between the tracker and fixed rate gap has fallen, especially for people with a low loan-to-value. The general consensus from our clients is that they would like security for the next couple of years.

We are seeing clients take the view that although 5yr fixed rates are cheaper than two years they feel that fixing at over 4% for 5 years is too high so they are opting for short-term, slightly more expensive fixed rates to see them through the next couple of years.

We've been having lots of conversations about people moving home and this is steering people towards 2y fixed rates as they want some stability but also the opportunity to look at their options in the next couple of years.