When Mr and Mrs Anderson* were seeking a buyer for their £9 million, 7-bedroom home in London, they reached the end of the mortgage term and moved onto their lender’s Standard Variable Rate (SVR).
At 3.49% above the Bank of England’s base rate, the interest payments increased considerably. The couple intended to repay the loan upon sale of the property and wanted to avoid refinancing, fearing they would incur an early repayment charge once they found a buyer.
“It’s pretty common that when homeowners reach the end of their mortgage term and they aren’t sure if they will soon be refinancing or selling, they allow their deal to slip onto the lender’s SVR,” says Simon Gammon, Managing Partner at Knight Frank Finance. “In most cases its worth refinancing to a tracker with no early repayment charges. That should give most borrowers some breathing room while they decide how to proceed.”
That was the case for Mr and Mrs Anderson. They signed a tracker at 0.35% above the Bank of England’s base rate and will save £112,800 in interest payments in the next twelve months unless they find a buyer.
It’s a common conundrum for borrowers that are grappling with the fastest period of monetary policy tightening in decades. The Bank of England on Thursday opted to raise the base rate to 4.50%, the highest level since 2008.
There remains considerable uncertainty as to the outlook for inflation and subsequently interest rates. While the UK’s official reading of inflation is likely to fall notably in the coming months as the worst period of the energy crisis falls out of the annual comparisons, goods prices are easing more slowly than policymakers had hoped. Economic consensus suggests the Bank of England will only cut the base rate to 3% by the end of next year and 2.5% by the end of 2025.
That poses tricky questions for borrowers seeking to remortgage. Much depends on the state of a given borrower’s finances and appetite for risk. Some choose to lock their rate for five years and forget about it, though most are weighing fixing for two years or waiting on a tracker for interest rates to fall. Both are running around 0.2% - 0.3% above base rate.
“The general view is that mortgage rates are going to come down but probably not for the rest of the year, at least not meaningfully,” says Simon. “Those choosing a product now need to think a year of two ahead. If you agree with economic consensus that interest rates will begin to ease next year, you probably won’t opt to fix for two years, but there remains a risk that interest rates will rise further. It really is a personal decision.”
The property market is recovering from a volatile end to 2022. UK lenders approved 52,000 mortgages for the purchase of homes during March, up 18% on February's figure, according to Bank of England data. The reading - a good indication of future borrowing - surpassed expectations and comes after Nationwide reported a monthly increase in house prices following seven consecutive contractions.
If you are seeking to purchase a home, refinance, or would like an informal chat about your property finance, please get in touch. Our team of experts would be delighted to talk through your options.
*Names have been changed to protect the privacy of the borrowers. The details are an accurate representation of a deal signed in May.