Will mortgage charges rise once more if rates of interest go up this week – and what ought to debtors do?

Mortgage rates have been coming down over the past week or two, having previously risen on news of the war in Iran. 

A raft of major lenders, including Nationwide, Halifax, TSB and Santander have cut rates, offering some respite to those who need to remortgage or move. 

Having been 4.83 per cent at the start of March, the average two-year fix rose to 5.89 per cent by 13 April. Over the last two weeks, that has fallen to 5.81 per cent.

However, the Bank of England’s next interest rate decision later this week could turn things back in the opposite direction. 

The central bank’s Monetary Policy Committee (MPC) meets on Thursday to decide whether to change the base rate, which is currently at 3.75 per cent.

Base rate determines the interest rate the Bank of England pays to commercial banks that hold money with it, and therefore influences the rates those banks charge people to borrow money or pays them in interest on their savings. 

If it was to rise on Thursday, it could take mortgage rates with it.  

What could happen to interest rates? 

At present, markets are pricing in one or two 25 basis point rate hikes in the remainder of this year, which could see base rate rise to 4 or 4.25 per cent.

The MPC sets interest rates to try to keep consumer prices inflation at the Bank and Government’s 2 per cent target. 

But with the situation in the Middle East still volatile and inflation rising to 3.3 per cent last week, there’s every chance mortgage rates could rise again, especially if the Bank of England proves hawkish at this week’s interest rate decision. 

Governor Andrew Bailey has hinted that rates could rise due to higher energy costs, but said the bank would not rush to make the decision.  

Rachel Springall, finance expert at rates scrutineer Moneyfacts, said: ‘Borrowers have been left in limbo. It is difficult to know whether they should rush to lock into a fixed deal or wait and see if lenders make more sizeable cuts.

‘Lenders will be watching the decision by the Monetary Policy Committee very closely, as it would be unwise to price deals too low in the short-term.’

She thinks that, even if the base rate stays unchanged, mortgage rates are unlikely to fall much more.  

‘Until the market sees more stability, there is very little scope for lenders to drop rates substantially due to the prolonged unrest in the Middle East,’ Springall adds. 

What should you do if you need a mortgage?

With mortgage rates having dropped in recent weeks, it may seem tempting to delay a remortgage in the hope of further reductions. 

However, Omer Mehmet, managing director at Welling-based mortgage broker Trinity Finance, says this is a risky move as rates could also rise. 

If your current mortgage deal ends, you will be put on your lender’s standard variable rate. The average SVR is 7.13 per cent which could cost you an extra £2,500 per year according to Moneyfacts.  

‘It’s a difficult time for borrowers, without a doubt,’  he says ‘Many will be looking at the rate cuts of the past week or so and wondering whether they’ll continue.’

‘If you’re in the early stages of a house purchase or are not due to remortgage for another few months or so, the good news is that you can lock into a rate now and, if rates come down materially before the transaction takes place, potentially switch to a lower rate whether with the same or another lender.’

Another option is to switch to a tracker mortgage today in order to get a slightly cheaper rate, and then lock into a fixed rate if it looks like rates will go up.

Tracker mortgage rates are now the cheapest on the market. These deals follow the Bank of England base rate, plus a certain percentage on top. 

For example, someone might be given a tracker mortgage at base rate, currently 3.75 per cent, plus 0.25 per cent.

This would set the rate they pay at 4 per cent. If the base rate rose to 4 per cent, though, their mortgage rate would immediately rise to 4.25 per cent. 

Trackers tend to come without early repayment charges. This means that, unlike fixed deals, they can often be paid off, overpaid or switched away from without penalty. 

Trackers aren’t right for everyone, though, as they mean your monthly payment isn’t fixed.  

At present the lowest two-year tracker rate on the market for someone buying or remortgaging is offered by Halifax. Its 3.96 per cent rate comes with a £1,499 fee. 

Craig Fish, director at London-based Lodestone Mortgages says trackers can be a good option for some people.

‘If you have genuine flexibility and can absorb a rate move upward, then yes, an early repayment charge free tracker gives you optionality without penalty.

‘We are seeing more borrowers asking about trackers, and in some cases we’re recommending them. 

‘But it’s not a one-size-fits-all answer.’