Thousands of UK households have a decision to make ahead of a bumper remortgaging deadline — lock in a pricier fixed-rate deal or bet on a Bank of England rate cut.
(Bloomberg) — Thousands of UK households have a decision to make ahead of a bumper remortgaging deadline — lock in a pricier fixed-rate deal or bet on a Bank of England rate cut.
As many as 56,220 two-year fixed-rate mortgages are due to expire in September, according to data from industry body UK Finance. That’s on the back of a flurry of sales in September 2021 when homebuyers were racing to complete deals before a stamp duty holiday ended.
Mortgage holders can typically secure new deals up to six months before their fixed-rate loans expire. Since January, as many as 71,100 households have been shopping for deals ahead of another crowded deadline in June, tied to a separate sales rush in 2021.
The Bank of England’s bid to curtail inflation has increased mortgage costs, prompting Britons to turn to other corners of the home loan market in an attempt to cut bills. That’s brought an end to the shift toward fixed-rate mortgages, as households turn to tracker deals — a type of variable loan which typically follows interest rates — in a bet that the central bank will finally slash borrowing costs at the end of this year.
The average two-year fixed-rate mortgage was 5.32% on Apr. 11, according to Moneyfacts Group Plc, more than two times higher than in September 2021. In contrast, the average two-year tracker deal was 5.05% this week, meaning cheaper monthly payments for variable loan holders, even after a lengthy BOE hiking cycle.
“The financial markets currently expect the bank rate to peak around 4.5% in August this year, before starting to fall back,” said Anthony Codling, who runs property website Twindig. The central bank “is hoping that if we take stronger medicine today, we will have a more comfortable life in the future,” he added.
To be sure, homeowners remortgaging on a fixed-rate deal are likely to benefit from a lower loan-to-value ratio than when they first secured a mortgage. That’s because UK house prices have grown by more than 11% since March 2021, according to Nationwide Building Society, and households have paid off a chunk of capital over the last two years.
Crucially, high-LTV lending makes up only a small fraction of UK mortgages, with 90% or higher LTV deals accounting for about 5% of all new home loans in the last quarter of 2022, BOE data shows. And even those borrowers who took out a 90% LTV in September 2021 are likely to see higher costs cushioned by stronger wage growth, according to Iwona Hovenko, an analyst covering European real estate for Bloomberg Intelligence.
“Homeowners who took mortgages at 90% LTV in 2021 could now see it drop to 75%,” she said. What’s more, “the extra post-tax pay after just two years could more-or-less offset the cash increase in monthly mortgage repayments.”
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