Economists, financial analysts, and prospective homeowners are looking into whether the current economic trends point to a better opportunity to leverage tracker rate mortgages or to stick to traditional fixed-rate options when hedging against potential risks. Here, we delve deep into the mortgage landscape, fixed loans versus other mortgage types, and how rising interest rates sway these choices.
Fixed Mortgages vs. Tracker Mortgages
Fixed mortgages come with a fixed interest rate for a predefined period, typically two or five years. Some UK mortgage lenders may be willing to provide a fixed-rate mortgage for up to 15 years.
Many borrowers prefer them for the security they offer, as the rate, and consequently the monthly repayment, remains constant regardless of the wider interest rate environment for a specific time. Thus, borrowers are shielded from sudden rate spikes.
Tracker mortgages are loans whose interest rate tracks another interest rate, typically the Bank of England (BoE) base rate. When the base rate changes, so does the interest rate of the tracker mortgage, and thus, the monthly repayment.
Borrowers therefore benefit from tracker mortgages when the base rate dips, allowing them to make reduced monthly payments.
Rising Interest Rates
A borrower's risk appetite is critical when determining which of these loans to take.
Given the current economic indicators, with inflation poised at a high, the general consensus is that the BoE will keep pushing the interest rates upward in the coming months, with projections hovering between 5.75% to 6.00%.
If a borrower believes that inflation is still firmly under control, the risk of a tracker mortgage may be seen as a smarter option, especially if the trajectory of future interest rates is expected to drop after hitting its peak.
Therefore, for individuals more open to risk or those not particularly price-sensitive and with a keen eye on the future market trend, tracker mortgages might appeal. They're prepared to see where the economic winds take them, hoping to leverage potential future dips in the BoE base rate.
On the other hand, for those seeking a sense of stability and predictability in their financial commitments, a two-year fixed rate seems to be a better option. Tracker mortgages might seem a gamble for most risk-averse borrowers in today's financial environment. By the time their fixed rate period ends, the hope is that the interest rates will start to decline.
For individuals with tighter budgets or apprehensions about possible rate escalations, the five-year fixed rate offers a longer buffer instead. This ensures that by the time they reevaluate their mortgage choice, rates might be on a downward curve, offering them better refinancing options.
How long before mortgage rates will drop?
Based on our forecast, the base rate will only start to drop by the end of 2024 or early 2025. Other markets are currently showing early optimism as of this time though. Bank of America and JP Morgan, for instance, predict that the United States will be avoiding recession this year and in 2024. Likewise, in Latin America, which was a year ahead of the UK in cutting interest rates, we have observed interest rates already coming down in the region.
We do believe, however, that the UK inflation rate will remain high in the next two years, considering the high level of food costs today. However, our analysis indicates that it will eventually reach a new market normal rate of 4%.
At this rate, we have observed more customers who are risk-averse and price-sensitive settling for fixed rates, but there's clearly some optimism among these borrowers that interest rates are likely to come down.
What's next for the mortgage market?
A potential decline in interest rates towards 4% could stimulate the housing market. Lower interest rates generally make borrowing cheaper, potentially increasing the demand for homes. This can lead to an uptick in home prices if supply doesn't match the heightened demand.
Our prediction also indicates a broader economic sentiment. A move towards a 4% interest rate could imply increased confidence in economic stability, controlled inflation rates, and stronger monetary policies in place. For potential homeowners, this could mean a more favourable environment not just for mortgages but also for other financial decisions.
Finally, as interest rates begin their descent, the appeal of tracker mortgages could see a revival. Borrowers with an appetite for risk might be tempted to switch to a tracker, capitalising on the dropping rates. However, the exact timing and rate of this decline will be crucial in determining the attractiveness of tracker mortgages.
On the other hand, those who've opted for the two-year fixed rates in hopes of better rates by the end of their term might find their predictions ringing true. These borrowers will be in a prime position to refinance or switch to a more favourable mortgage type, potentially saving significant amounts in the longer run.
Interested in taking a mortgage?
The Mortgage Hut has a team of mortgage professionals ready to offer valuable advice on the best mortgage option that fits your financial standing. Speak to an adviser today by calling us at 02380 980304. You also email us at firstname.lastname@example.org, or book an appointment through our contact form.