UK mortgage rush as householders look for variable deals

As the Bank of England reaches the top of its interest rate cycle, fixed-rate loans are increasingly looking unattractive

Homes for sale on the window of an estate agent in Liverpool. The number of people in the UK looking for a variable mortgage has more than doubled. Bloomberg
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The Bank of England's 0.5 per cent interest rate increase on Thursday will have increased the monthly payments for the millions of UK mortgage holders who are not on short-term fixed deals, tightening the squeeze on household budgets.

However, with economists now predicting that the Bank of England's current cycle of interest rate increases is coming to an end, mortgage hunters are turning their sites to tracker deals, where the interest rate varies, but will shadow the Bank of England's base rates as, if predicted, they fall.

The Office for National Statistics recently said 1.4 million households would face higher mortgage payments when they come off fixed-term deals where the rate has been set for the past two to five years.

But fixed-rate deals can be relatively more expensive, because of the element of risk. However, with UK interest rates close to or at their peak, variable rate deals are suddenly more attractive.

Variable over fixed

Since the era of cheap fixed-rate deals came to a grinding halt last year, the share of people looking for a variable or “tracker” mortgage when they buy a house or remortgage has more than doubled.

According to the mortgage comparison website, Koodoo, about 20 per cent of those remortgaging searched for variable rate deals in December, up from 5 per cent a year earlier.

For those looking to buy a house, the share of searches for tracker deals jumped from 8 per cent in December 2021 to 21 per cent a year later.

“You don’t want to lock in over 5 per cent for five years,” said Andrew Wishart, property economist at Capital Economics.

“People generally think that mortgage rates aren’t going to stay as high as they were in October and November for a long time. Certainly over a five-year period, the likelihood is that you will save money by being on a tracker.”

File photo of an aerial view of terraced houses in south west London. Issue date: Sunday January 1, 2023.

Falling rates

The switch in the nature of searches took off in the second half of 2022, and especially following the failed budget proposed by Truss administration and mortgage prices rose significantly.

But now the markets generally feel that the Bank of England may have one or two increases left in this interest cycle and that base rates will peak at 4.5 per cent in the summer, with the possibility of a cut towards the end of the year.

Anthony Codling, who runs the property website Twindig, contends that with fixed-rate deals still way above 5 per cent, it makes more sense to opt for a fluctuating loan.

“Over the next two to five years, increasing numbers of homeowners expect mortgage rates to fall,” he said.

“They don’t want to lock into a rate today which might be lower in the future.”

According to MoneyFacts, the average two-year fixed-rate home loan was 5.46 per cent earlier this week, down from a 14-year high of 6.65 per cent in October.

But the average two-year tracker deal was 4.39 per cent, which would still be cheaper, even given Thursday Bank of England rate increase.

“Over the last six to nine months, that spread between the bank rate and the variable rates has narrowed and I think that probably just makes it a more attractive choice,” said Tom Bill, head of UK residential research at Knight Frank.

“In a penalty-free variable rate, you can go on to that as an interim measure in the knowledge that fixed rates are probably going to edge down slightly.”

Updated: February 03, 2023, 8:39 AM