How far will mortgage rates drop?
In positive news for those needing to remortgage in the new year, there is confidence that rates will continue to decrease. Nicholas Mendes of broker John Charcol says, “At the start of the year, we should see more lenders release sub 4.5pc five-year fixed rates, with best buys edging closer to 4pc. Two and three-year fixed rates also coming down to 4.5pc.
“Spring to mid-2024 expectations of a sub-4pc rate will be on the cards as markets continue to price in a reduction to Bank Rate in future years.”
Chris Sykes, technical director at mortgage broker private finance, also expects the new year to herald cheaper rates. “Lenders don’t generally like to rock the boat over Christmas, so we are likely looking at the first week of January.”
The positive outlook is shared by David Hollingworth of L&C Mortgages, who believes lenders fighting for borrowers will be “very aggressive in the new year.”
How can I get the best rate for my mortgage?
Borrowers who put more equity into a property make themselves less risky customers, increasing the chances a lender will be happier to offer them lower interest rates.
Banks use the term “loan-to-value ratio” (LTV) to label how much they lend a borrower against a home. For example a £160,000 mortgage on a £200,000 home would be a loan-to-value of 80pc.
A lower loan-to-value and bigger deposit will unlock lower interest rates. Mr Anderson said: “It can make quite a big difference to the amount of interest you pay over the term of the deal.
“So if you have cash available you may want to consider paying down part of the mortgage to access a better rate.”
Our mortgage overpayment calculator can help you weigh up whether you’re better off overpaying your mortgage, or putting your extra cash into a savings account.
Households with a significant cash pile could also access lower rates by using an offset mortgage. A handful of banks allow borrowers to reduce the cost of their loan using cash held in an account with the same lender.
For example, a customer borrowing a £500,000 mortgage and with £200,000 in savings would only pay interest on £300,000 of the loan, but will forfeit any interest on the cash pot.
Based on a mortgage interest rate of 4.5pc, this would reduce monthly interest from £1,873 a month to £1,124 – a saving of £749 each month.
Mr Anderson said: “Offset mortgages are proving especially popular as tax thresholds are shrinking and reducing households’ personal allowance.
“There should be no tax to pay on savings used to offset the mortgage balance and you should not be paying interest on the mortgage balance offset by the cash funds. The account should also be instant access so you still have access to liquidity if circumstances change.”
Borrowers opting for a more specialist mortgage, such as an offset deal, should consult a mortgage adviser. The market is changing rapidly and with savings rates also on the rise, independent advice could save a lot of money.
What about interest-only mortgages?
Any homeowners struggling to pay their mortgage bills are able to switch to interest-only deals without a formal repayment plan. City watchdog, the Financial Conduct Authority, announced the change last year in a bid to help lenders provide mortgage forbearance at scale.
However, once the temporary interest-free period is over, homeowners must make up their repayments. To switch to a permanent interest-only deal, you’ll still need a credible repayment plan.
This article is kept up-to-date with the latest information.
