We recently had what is hoped to be the first of many Bank of England (BoE) base rate cuts this year.
While these are expected to feed through into fixed rate mortgages, they should also bring tracker and discounted rates back into contention.
There have been predictions that the BoE could cut the base rate as many as five times this year.
In early February, analysts at Panmure Liberum predicted a drop from the current 4.5% to 3.25% by the end of the year. Others are a bit more cautious, expecting just fewer cuts, but overall, most agree that the base rate is coming down.
With the base rate expected to fall, we might see the mortgage market move into a territory we haven’t seen in a while, where tracker or discounted mortgages could be just as attractive – if not more so – than fixed rates.
Fixed rate mortgages have not always been the preference
It’s hard to believe, but it was all the way back in 2010 when variable rates were more popular than fixed rate mortgages, according to data from the Financial Conduct Authority (FCA).
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In the fourth quarter of 2010, variable rates made up 54% of all new lending, when the base rate was just 0.5% and the average variable rate was 3.03%. In comparison, the average fixed rate was 4.38%.
Since then, fixed rate mortgages have taken over. By the third quarter of 2024, fixed rates accounted for 93.26% of all new lending, while variable rates dropped to just 6.74%. The average fixed rate was 4.82%, while the average variable rate was 5.92%, according to the FCA’s data.
Now, with the base rate expected to drop again this year, variable rates might start making a comeback and grab a larger share of the market than they’ve had these past few years.
A new way of thinking
Take a discounted mortgage, for example. A discounted rate gives a reduction on the lender’s standard variable rate (SVR).
So, if a lender’s SVR is currently 8.49% and they offer a 3.25% two-year discount, the borrower’s rate would be 5.24%. With the possibility of up to five more base rate cuts this year, that discounted rate could be a lot lower this time next year.
While a fixed rate mortgage might still be the better option for some borrowers, the falling base rate environment should bring tracker and discounted rates back into the mix, making them more serious contenders for brokers and their clients alongside fixed rates.
Fixed rate mortgages have been the go-to choice for most borrowers for over a decade, so this shift might take some getting used to for both brokers and borrowers. This is especially true since, at several points over the last 10 years, five-year fixed rates have been the most popular choice.
Many of the 1.8 million fixed rate borrowers looking to remortgage this year might be moving on from a five-year fixed rate. For those who are relatively new to the housing market, a fixed rate mortgage might be the only one they’ve known. Switching from the stability of a five-year fixed to a discounted product, for example, might feel like stepping into the unknown. That’s why brokers’ advice will be essential in helping clients navigate the different choices and which option is best for them.
We’re already starting to notice some subtle price changes since the base rate started to fall last August.
Back in February 2024, when the base rate was 5.25%, the average lender SVR was 8.17%, according to Moneyfacts. At that point, the average two-year fixed rate was 5.56%, and the average five-year fixed rate was 5.18%.
Fast forward a year, and the average SVR in February dropped to 7.78%, while the average two-year fixed rate was at 5.52% and the average five-year fixed rate had gone up slightly to 5.32%.
What’s interesting here is that the drop in SVR has been more noticeable than the fall in two-year fixed rates, and the price of five-year fixed rates has actually increased.
If we do see the base rate continue to fall, discounted and tracker rates should start to play a larger role in discussions between brokers and their clients. With the anticipated base rate cuts, we may be entering a new chapter for the mortgage market – one where fixed rates are no longer the dominant choice.
