Fixed or tracker: As Brexit prompts mortgage rates to tumble, how long should borrowers hold out for?
Brexit might have thrown markets into turmoil, but if you’re thinking of taking out a mortgage, or are remortgaging, rates are about to get even more competitive.
Since the referendum began in earnest, investors have clambered to buy government bonds, driving down yields and enabling mortgage lenders to offer more long-term funding. Banks have been given further impetus to lend by the Bank of England’s decision to release them from a requirement to hold capital buffers in case of a downturn, freeing them to lend a further £150bn.
Further to fall
“Lenders will be cutting their fixed mortgage rates even further over the next few weeks,” says Ray Boulger, of mortgage broker John Charcol. Fixed rates of one, two and three per cent can currently be obtained on two, five and 10 year deals. Two days before the referendum, HSBC cut its two year fixed rate mortgage from 1.16 per cent to a record-breaking 0.99 per cent on loans of up to £500,000, and other providers are expected to join in the slashing.
But should you plump for a fixed rate, or choose a tracker in the hope that the Bank of England cuts the benchmark interest rate even further?
Aaron Strutt of Trinity Financial Group expects that rates on two, three, five and 10 year fixed deals will all become cheaper, as the cost of funding comes down and the prospect of a rate rise from the Bank of England looks less and less likely. “Coventry Building Society has launched a 5 year fixed rate at 2.09 per cent, albeit with a maximum loan value of 50 per cent, so you’d need a 50 per cent deposit to access it, which is quite large,” says Strutt.
Switch-and-fix
Governor Mark Carney has himself said that some monetary easing will likely be required over the summer, and a number of City economists are anticipating the announcement will come this Thursday. Capital Economics is anticipating the benchmark rate will be cut from 0.5 per cent to 0.25 per cent, where it will remain throughout 2017.
“Tracker rates have been pretty well priced for quite some time now,” says Strutt. “Halifax has a 1.29 per cent two year tracker requiring a 40 per cent deposit. It also comes with a £999 fee, but if the benchmark rate does come down by 0.25 per cent – or even 0.5 per cent – at some point in the future, tracker rates are likely to reduce by that amount as well.”
Read more: David Cameron warns of mortgage rise if Britain votes for Brexit
Borrowers should consider holding off, if possible, to see where the market settles, argues Boulger. “If you’re remortgaging, wait until the second half of July, when cheaper rates are likely to emerge. If you’re buying a new home, an independent broker will be able to get you a deal which allows you to switch to a tracker when rates go down,” he says.
Tesco, Woolwich and Virgin Money have switch-and-fix deals which allow borrowers to take out a tracker rate and move to a fixed rate without incurring any early repayment charges.
“On Tesco’s two year tracker, you would start off paying 1.39 per cent, which would come down to 1.14 per cent if there was a rate cut,” says Boulger. Alternatively, you could take out a 10 year tracker now and switch to a fixed rate if and when the benchmark rate goes up.
This article appears in the July edition of City PM's Money magazine, which will be distributed with the paper on Thursday 14 July.