Mortgage prices are expected to fall more in the coming weeks, with the Bank of England (BoE) set to cut interest rates in spring, experts predict.
Inflation fell to 3 per cent in the year to January, in line with most economists’ forecasts, which has solidified expectations of an interest rate cut from the BoE.
Mortgage rates tend to roughly follow swap rates, which are based on long-term predictions for where the BoE base rate will go in the future, and so experts now believe the certainty of another rate cut sooner rather than later could give banks confidence to lower their home loan prices.
But rates on shorter fixed rates are lower than longer-term ones, presenting buyers and homeowners with a dilemma.
So what sort of deal should you go for? We spoke to experts to find out.
Where could mortgage rates go?
Wednesday’s inflation reading was roughly what economists predicted at 3 per cent, but jobs data revealed earlier this week showed higher unemployment than some predicted.
High interest rates can weigh down on the economy, and so a secondary factor that can prompt rate cuts, after inflation figures, are indicators that the economy is struggling, like a struggling jobs market.
Experts think a March cut from the BoE is now close to being nailed on, and that another cut could follow in summer, which could prompt more reductions to mortgage rates.
The base rate is currently at 3.75 per cent so two cuts could reduce it to 3.25 per cent.
Robert Wood, chief UK economist at Pantheon Macroeconomics, said a March cut was “highly likely” while Sanjay Raja, of Deutsche Bank, said he was predicting cuts in March and June.
The average two-year fixed mortgage rate sits at 4.85 per cent, and the average five-year at 4.97 per cent, according to data from financial firm Moneyfacts.
The cheapest deals on the market are well below this, sitting at around 3.5 per cent for those with the biggest equity in their home.
Hina Bhudia, a partner at Knight Frank Finance, said: “The combination of softer inflation data this morning and weak jobs figures yesterday raises the likelihood of two rate cuts this year.
“Leading fixed rates have remained steady in the past four weeks and there has been considerable jostling for position in the middle of the market.
“We think this week’s figures will pave the way for fixed rates to ease further in the coming month, leading up to the next interest rate decision on March 19. Any falls will be incremental, but they will have a meaningful impact on sentiment.”
Why are two-year rates lower than five-year ones?
Two-year rates are generally cheaper than five-year mortgages at the moment because banks and lenders have more certainty around interest rates in the near-term than in the long term.
Interest rates are almost certain to drop further this year, and economists aren’t predicting rate rises from the BoE this year or next, for now.
But it’s harder for them to predict longer-term, and there is a risk that interest rates could rise in the future.
“Because fixed rates are dependent on where rates are expected to head, we’re back to the normal situation where borrowers tend to have to pay a little more for longer-term security than short-term rates,” explains David Hollingworth of L&C Mortgages.
“That’s because rates are priced in the expectation of further rate cuts to come this year before rates bottom out. In the longer term, the current forecast is that the base rate will drift back up over time.”
Lewis Shaw, a broker at Shaw Financial Services, adds: “The spread opening up between five and two-year rates is a market signal. Markets think interest rates may be the same, or possibly a little higher, in 24 months.”
Should you get a two or five-year mortgage fix?
Getting a two-year mortgage fix ensures you will get a cheaper rate now, and therefore will pay less.
It also gives an extra advantage in that if rates do go down further in the next two years, you can benefit as soon as your deal ends.
If rates go up in the next two years, however, you may end up paying more when your two-year deal ends.
With a five-year deal, you pay more now, but you have certainty for five years, and you are protected if prices rise.
“There will still be some that decide to take a five-year option, stability being the main reason, and for some borrowers they just prefer not having to think about it again so quickly after sorting the last remortgage,” explains Elliott Culley, director at Switch Mortgage Finance.
A two-year fix is an option for those prepared to take a risk.
“This has been seen recently as more of a risk but with the potential for more reward, if rates do continue to fall,” he adds.
A second factor to consider is whether you plan on moving home before your fix ends.
If you do, it is possible to port the mortgage to the new property, but this usually requires a new application, re-valuation, and updated affordability checks.
“If a move of house is on the cards in a couple of years, then they may prefer to keep their options open with a shorter-term deal, but those staying put may prefer to bag a longer-term rate,” adds Hollingworth.
