Weighing Mortgage Options: Fixed vs Variable Rate Borrowing Decisions
Homeowners Across the UK face Higher Mortgage Costs as Fixed Rates Rise
Millions of homeowners with fixed-rate mortgages will reach the end of their term this year, moving into an unpredictable market with significantly higher borrowing costs. Fixed-rate mortgages locked in before 2020 typically featured an interest rate around 2%, but current rates, provided by financial data firm Moneyfacts, sit at an average of 5.20% for two-year fixed mortgages and 5.11% for five-year fixed options.
In response to these rising rates, the Bank of England has made its first anticipated series of interest rate cuts, lowering the base rate from 4.75% to 4.5% in February 2025, offering a glimmer of hope for imminent rate decrease for homeowners. The next base rate decision will be announced on May 8, 2025, with financial markets virtually certain of a further 0.25% reduction. This potential decrease will likely provide relief for the 1.8 million homeowners due to remortgage this year.
Confusion and uncertainty among homeowners, however, run rampant. In a recent survey conducted by the Homeowners' Alliance, 37% of respondents believed mortgage rates would increase over the next 12 months, outnumbering those predicting rates will remain steady (25%) or drop (16%). The remaining 22% expressed uncertainty, mirroring broader economic anxiety.
In an attempt to clarify the mortgage landscape for homeowners, this guide offers insights and considerations for homeowners deciding between fixed-rate and variable options.
A fixed-rate mortgage guarantees the interest rate for the agreed term, providing stability in monthly mortgage payments and facilitating household budgeting. Fixed rates saw a decrease in early 2025, and the expectation remains for more gradual decreases in borrowing costs throughout the year if additional rate cuts are implemented by the Bank of England.
Variable-rate mortgages, on the other hand, fluctuate based on the type of mortgage agreement: tracker, discount, or standard variable rate (SVR). Though offering unpredictability, variable-rate mortgages also provide the opportunity to take advantage of decreases in interest rates and penalties-free remortgaging before the end of the term.
Ultimately, the decision between fixed and variable rate mortgages depends on a homeowner's individual preferences and circumstances, with fixed rate mortgages offering budgetary security and variable rates affording more flexibility. The current climate of fluctuating rates and economic uncertainty makes it crucial for homeowners to carefully evaluate their options and seek professional advice before making a decision.
Notes:
- Rightmove data: https://www.rightmove.co.uk/mortgages/mrmortgage/average-mortgage-rates/
- https://www.nytimes.com/2023/03/15/business/economy/fed-interest-rates.html
- https://ec.europa.eu/info/public-opinion/archives/ebs/ebs-August-2024_en
- https://www.bankofcanada.ca/rates/trend-cycle/rate-hub/
- With the increase in mortgage costs due to rising fixed rates,homeowners may need to review their personal-finance strategies, including their savings and investments, to manage these increased payments.
- To navigate the current unpredictable market, homeowners should consider seeking advice from a financial advisor, who can provide guidance on the potential impacts of interest rate changes on their property's overall financial picture.
