When will mortgages get cheaper and is offsetting the answer?

Ever since the Bank of England paused interest rates more than a year ago, borrowers have been expecting mortgage rates to start falling. The fact we’ve only seen a single cut of 0.25% so far is likely to have been a huge disappointment.

Those who are facing a remortgage in the coming months would be forgiven for wondering when mortgage rates will finally get cheaper, and there’s good and bad news on this front.

The good news is that fixed rate mortgage rates have already fallen a fair amount. This time last year, the average two-year fixed rate was 6.53%, according to Moneyfacts. It’s now 5.4%, and it’s possible to get a two-year fixed rate below 4% if you have a decent wedge of equity in your property.

The Bank of England is expected to cut rates from here, with one cut before the end of the year, and additional cuts adding up to about one percentage point by the end of next year. However, we can’t get too excited, because not only are these cuts not guaranteed, but they have already been priced into fixed rate mortgages.

It means that while there’s a decent chance fixed mortgage rates will gradually inch down, we won’t see a dramatic step change. Anyone who needs to remortgage soon is unlikely to see deals get significantly cheaper, so the question people are likely to be asking themselves is whether it’s worth fixing now or waiting for falls later.

If you wait, fixed rate mortgages may fall slightly, so you could find a cheaper deal. However, if you’re on a standard variable rate while you wait, that small gain will be completely wiped out by the extra mortgage payments you’re making now.

The other option is to move to a tracker rate while you wait for mortgage rates to fall. You can get trackers that charge around £1,000 in fees at the start and then have no fees on exit, with a rate of as little as 0.5% above the Bank of England base rate. This is more expensive than the cheapest fixed rates at 4%, but you may take the view that it’s worth paying more for a period in order to benefit further down the line if rates do fall.

Having said that, there’s no way of knowing how far rates will fall, or how fast. Rates could theoretically even rise again if we’re hit by any unexpected shocks that push inflation up. It means moving to a tracker involves risk. You’re paying more today in return for the hope that it’ll be cheaper later, but there are no guarantees. Given that we’d need rates to fall 1.5% for your tracker to be as low as today’s competitive fixes, you might decide it’s not worth the wait.

Another option on the table for bringing down the cost of your mortgage is an offset product. This might appeal to people who have a reasonable sum of savings, because you hold your savings and mortgage in the same offset account, and instead of being paid interest on your savings, they are taken off the total of what you’re borrowing, so your mortgage is cheaper.

Unfortunately, this is better in theory than in practice. Only a small number of lenders offer these products, and they’re harder to make money from, so the mortgage rates tend to be higher. At the moment, savings rates are higher than mortgage rates too, so you’ll be missing out on better rates elsewhere. It means offsetting isn’t a magic bullet.

None of this will come as great news to anyone facing a remortgage. You’re essentially faced with a choice between a fix right now or a mortgage that’s actually more expensive than a fix today, and might not drop below typical fixed rates for over a year. The answer to the age-old question of when mortgage rates might fall is likely to be ‘not soon enough’.

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