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Article Information Author, Kevin Peachey Role, Cost of Living Correspondent
13 July 2024 03:42 BST
Competition between mortgage lenders is intensifying ahead of key interest rate decisions from the Bank of England.
Many lenders have recently reduced the costs of new fixed-rate mortgages.
Though brokers expect further cuts, mortgage rates remain far higher than what homeowners have become accustomed to for a decade.
Lenders' funding costs are showing signs of falling as they expect banks to cut their base interest rates for the first time in four years.
Analysts believe it could be raised from its current 16-year high of 5.25% on Aug. 1, but there is no certainty yet.
Expensive loans
The interest rate on a fixed rate mortgage will not change until the end of the contract (usually 2-5 years later) when you will be replaced by a new contract. If you do nothing, you will remain on an adjustable rate, which can be very costly.
About 1.6 million existing borrowers have relatively cheap fixed-rate contracts expiring this year.
You could be moving from an interest rate of less than 2%, which could result in a significant increase in your next mortgage payment.
According to financial information service MoneyFact, the average interest rate for a two-year fixed rate is 5.92%, while the average interest rate for a five-year fixed rate is 5.5%.
The prospect of interest rate cuts from the Bank of England bodes well for lenders' funding costs, with many lenders reducing the rates they charge customers.
They also study what their competitors are doing and their own levels of customization to determine where to set their costs.
Many major banks have cut interest rates in the past fortnight, with Barclays cutting rates three times and a host of other banks including Nationwide, Virgin, Coventry and Skipton.
Aaron Strutt of mortgage broker Trinity Financial said there was “more positive news” coming from the lender side, and he suggested that those who had recently agreed new deals might still have time to renegotiate better terms.
These developments have led some to suggest that sub-4% trading could soon return to the market, while others are more cautious.
Kylie Ann Gatecliffe of KAG Financial said many of the predictions of falling interest rates had proven wrong.
But she said clients have told her they had been putting off relocating because of the turmoil of the past few years, but are now choosing to move.
She said people were considering their options in more detail, including whether to borrow more to move or use the money to renovate their homes instead.
A “close call” decision
A recent Bank of England report said that around three million households are set to see their mortgage payments rise over the next two years, including 400,000 mortgage holders who face a “very significant” rise in their payments.
The company also said renters continue to feel pressured by rising living costs and interest rates.
The UK economy grew at a faster-than-expected pace in May, leading some analysts to comment that a rate cut by the Bank of England in August is likely, although they acknowledge that the decision remains delicate.
How to make your mortgage more affordable
Pay early: If you can still afford a low fixed-rate deal, you may be able to save later by paying more now. Switch to an interest-only mortgage: You don't have to pay off any debt you incurred when buying a home, but you can keep your monthly payments to something you can afford. Extend the term of your mortgage: 25 years is the typical mortgage term, but 30 and even 40-year terms are now available.
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