George Wakely took out a five-year fixed mortgage last September, during a tough time for homeowners, when high mortgage rates were the norm.
The 26-year-old said the offers he was getting to remortgage his two-bed property in Scarborough, North Yorkshire were “terrible”.
But time was running out as his original two-year fixed deal with NatWest was coming to an end. He was paying £450 in monthly repayments, and he didn’t want to pay much more.
Rates had started to fall a little at the back end of 2023 but they would have been higher than they are now.
Speaking to i, PR manager George said: “I bought my lovely house – which I share with my dog Bruce – back in 2021.
“When it was time for me to look for another deal, I found myself stuck between a rock and a hard place because I really didn’t want to pay much more than I already was every month. I wanted to make a decision that would save me the most cash in the long run.
“When I was looking and I knew I wanted to stick with a fixed rate, one lender offered me 12 per cent for a five-year fixed-rate deal. I declined this one, unsurprisingly, and I found another one with NatWest that was within my budget.
“I didn’t know what the future would hold so the five-year fixed offer with a rate of 5.84 per cent was the most tempting for me.”
Now, George finds himself questioning why he didn’t take more of a risk by opting for a shorter-term deal, or a tracker rate, as his current monthly repayments of £680 means he has to sacrifice the things he loves.
He added: “Costs are constantly going up and salaries are stagnating. When I decided on the five-year fixed deal originally, I thought I could afford it, but everything is more expensive now and I haven’t had a pay rise to bridge that gap.
“I am having to sacrifice treats and luxuries such as holidays for the sake of keeping a roof over my head. And the rental market is no better. I feel like I have nowhere to turn.”
George bought his property for £118,000 and his original mortgage was £101,000, meaning his loan-to-value (LTV) rate is 14.4 per cent.
Looking back, he wishes he had opted for a tracker deal, saying: “If I had stuck with a shorter-term deal, I could have found a way better deal and ended up paying less on my monthly mortgage repayments now. I should have gone for a tracker until the interest rates had calmed down.”
Five-year or longer fixed deals are typically the cheapest rates at the moment, compared to shorter term fixed deals and tracker rate options, making them more popular.
Two-year fixed deals are around 0.5 per cent more expensive than equivalent five-year deals, and there can be 1.5 per cent between a two-year tracker and a five-year fixed, not that the comparison is that easy to make.
Justin Moy of EHF Mortgages said: “Five-year deals should have been chosen for their security of payments over that time, matching the needs of the borrower, not just because they were the cheapest monthly payment.
“They will also avoid the cost of remortgaging in two- or three-years’ time, and it’s unlikely that rates will go sub-3 per cent in the near future too. For every month their rate is below an equivalent shorter deal, they are saving, but be prepared to pay a little extra over time for that security.”
When asked if he would consider remortgaging now that rates are down, George said: “I’d have no idea where to start. My property is a shared-freehold property, so I am quite limited in my options.”
Nicholas Mendes, head of marketing at John Charcol, suggested making overpayments to reduce the balance faster, which can save on interest in the long term and enable a homeowner to look at a lower LTV product when they come to the end of their fixed term.
He said: “You should also stay informed about market trends, as falling rates might present better opportunities to switch or renegotiate your mortgage in the near future. Although breaking a five-year fix early often comes with early repayment charges, with rates coming down, it might still save you money in the long run.
“To determine if paying an early repayment charge (ERC) is worthwhile, calculate the potential savings by comparing your current interest payments with those of a new lower-rate deal. Factor in the ERC and any additional fees associated with the new mortgage. If the overall savings from the lower rate exceed the cost of the ERC and fees, it may be beneficial to make the switch.”
An ERC is a fee to your mortgage lender, which you might be asked to pay if you want to reduce the amount you’ve borrowed, perhaps by paying off a lump sum.
David Hollingworth, associate director at L&C Mortgages, said: “It’s always difficult to try and time the market and it’s important to remember the reasons why you went for a specific deal. For example, the benefit of greater certainty that a five-year rate would give and probably at a lower rate than the corresponding shorter-term deal at the time are not bad decisions.
“What no one can ever tell is just how interest rates may behave in future and Thursday’s decision to cut was very much in the balance. Fixed rates are trying to predict where rates are headed, and anything can happen.”
The Bank of England recently cut interest rates from 5.25 per cent to 5 per cent, the first drop since the onset of the pandemic in March 2020.
While homeowners with fixed-rate mortgages will see no immediate effect on their monthly payments, the rate cut could still have an impact for some in the months ahead.
About 1.6 million homeowners have fixed-rate deals that will expire this year. Many of these deals will be relatively cheap as they were arranged before the Bank started to increase rates in late 2021.
As a result, many homeowners will be facing big increases in their monthly payments when they come to re-mortgage.