If you are about to come off a fixed rate or buying a property you will be forgiven for feeling a bit flummoxed at the moment.
Borrowing a large sum of money to buy or remortgage your house is taxing both emotionally and financially at the best of times. But when we are in the midst of a what can only be described as a rate rollercoaster, it can add an additional element of fear and uncertainty.
In summary the war in Iran has driven up prices of mortgages in the last month by over 1% on average. This, according to Adam French, head of consumer finance at Moneyfacts, added roughly £1,700 a year to the cost of a typical mortgage
This means if someone took out a mortgage before events in the Middle East intensified, they would be paying £1,700 per year less than someone who took out a mortgage for the same sum in late March.
But here comes the plot twist, around two weeks ago, just after a ceasefire was announced in Iran, lenders began reducing mortgage rates. It was not a big cut, did in no way rectify the sharp increase of March, but it offered slightly lower prices and a bit of hope for borrowers.
Sadly, with that glimmer of optimism came more confusion, leaving borrowers wondering – ‘should we wait for more cuts?’
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Borrowers have been left in limbo as it is difficult to know whether they should rush to lock into a fixed deal or wait and see if lenders make more sizeable cuts.”
Will lenders cut mortgage rates further?
Springall said whether or not there will be further cuts is ‘up for debate’. It is certainly not something anyone can accurately predict.
Lenders use something called ‘swap rates’ to set their pricing and these are governed by gilts – or government bond – yields which have, according to Sarah Coles, head of personal finance at AJ Bell, had a ‘torrid few weeks’.
This could suggest that prices are now going to stick where they are for a while. Or, even, go up. Coles continued: “During the first half of April, inflation fears eased slightly, so the market started expecting fewer rate rises. It’s why we’ve seen mortgage rates fall a little and savings rates stabilise.
“However, the drama has continued more recently, because political speculation put investors off government gilts and yields rose again. It means we could see rates rise once more.”
Will interest rates go up this week?
Another factors borrowers may want to consider is the Bank of England base rate. This doesn’t impact fixed rate pricing quite so much as swap rates, but it does affect tracker and variable rate mortgages.
At the last price-setting meeting the Bank of England (BoE) held the base rate at 3.75% due to the turmoil in the Middle East.
They are due to make their next rate setting decision on Thursday, 30 April. The most likely outcome is they will hold rates again. But according to AJ Bell, markets on Monday morning were pricing in a 17% chance of a rate hike.
Coles said: “An awful lot will hang on what the market thinks will happen next. If the Bank of England hints that it might raise rates to combat inflation, it would hike gilt yields, and push savings and mortgage rates up. Similarly, escalation in the war could stir more fears of inflation, which again would increase rate expectations.”
Mortgage borrowers – should you wait or move?
Whilst both Coles and Springall are in agreement that what happens next is impossible to guess, it does not mean borrowers have to remain in limbo.
Rather than trying to work out what will happen to mortgage rates, consider your own plans – what do you need to happen next?
Coles said those with a remortgage due in the next six months might want to agree a deal for their remortgage now.
“If rates fall from here, they can shop around elsewhere closer to the time, whereas if they rise, they’ve protected themselves from bigger hikes in their monthly payments,” she said.
Meanwhile, Springall warned waiting around for prices to fall may mean you default to your lender’s standard variable rate, which can often be more expensive.
“It is still worth moving off an expensive revert rate,” she said, “as borrowers could save almost £2,500 a year moving onto a fixed rate deal.”
She also said base rate tracker mortgages currently look attractive, but warned they could be a gamble if interest rates rise this year. For this reason, choosing a deal with no early repayment charge would be smart.
If you can use a broker or mortgage adviser to guide you through your application and remortgage process, this would take away a lot of the hassle.
“Any borrower concerned about securing a mortgage would be wise to seek advice from a broker to navigate the mortgage maze,” Springall added.