Over a million households on variable mortgages are paying hundreds, if not thousands, more on their home loans each year compared to those on fixed rates, despite interest rates being slashed.
The vast majority of homeowners are on fixed rates but 629,000 are on tracker deals, which go up or down when the base rate does, whilst close to 700,000 are on standard variable rate (SVR) deals, which tend to fall but only at the discretion of the lender.
The Bank cut the base rate by 0.25 percentage points this week, which mean many will see reductions to their bills, but experts say these homeowners still face “significantly higher monthly payments” than those on fixed deals.
For example, a homeowner on the average standard variable rate could still be paying as much as £4,000 more per year than someone on a fixed deal, even after the Bank of England cut the base rate to 4.5 per cent.
In recent years, people have opted to stay on variable rates instead of fixing, in the hopes that long term deals will drop in price.
Fixed rates rose above six per cent in 2022, following Liz Truss’ mini-Budget. Although they have since come down, the best deals are still hovering around the four per cent mark with many waiting for them to come down further.
Most economists predict that the Bank of England will cut rates again this year, but this is not guaranteed, and the longer another cut is delayed for, the more tracker customers will overpay.
square PENSIONS AND RETIREMENT ExplainedWhat is stagflation - and what it means for mortgages and pensions
Read More
What is stagflation - and what it means for mortgages and pensions
Read MoreImmediately before the base rate was cut on Thursday, the best tracker deal on the market for those with 25 per cent equity in their home was 4.90 per cent with a £1,499 fee from Halifax.
Those who opted for this deal will see their rate fall to 4.65 per cent this month after the base rate cut, but they will still be paying more than someone in the same position who opted for a two-year fix, where the cheapest rate was 4.31 per cent from Lloyds.
Someone opting for the fix on a £250,000 property would pay £1,022 per month, whereas someone on the tracker would be paying £1,058 per month even after Thursday’s cut. This equates to a difference of over £400 per year.
Meanwhile, the average standard variable rate sat at 7.78 per cent on Thursday, but even with a 0.25 percentage point cut to 7.53 per cent a household would be paying £1,390 per month – more than £4,000 per year than the person who took the fixed deal.
Some could be paying even more than the average rates, meaning their bills could be considerably higher.
The higher the bills, the less disposable income a household will have – something Keir Starmer has promised to improve under his Government.
‘I was paying more on a tracker – so now I’m fixing’
Imogen Hart, 40, opted to go on to a tracker mortgage in 2023 on expectations that the Bank of England would start to cut rates soon. Two years later she is now opting to move to a fixed deal from April, which will save her money.
Imogen, who works in PR, is currently paying £2,800 per month on her mortgage for her two-bed flat in West London, which she lives in with her partner and their son.
But she expects this to go down to around £2,700 when they fix.
Imogen Hart is switching to a fixed mortgageShe says: “We went on the tracker in April 2023 when the advice was that rates would soon start to go down.
“I definitely knew it was a gamble, and the rate changes have been a pain but not life changing, but I now see the value of the certainty.
“While I was on the tracker, it made me more interested in headlines on what was happening with the bank rate, and it will be nice to not have to worry about that as much.”
Since April 2023, the bank rate has risen from 4.25 per cent to 5.25 per cent and now gone back down to 4.5 per cent, so the family’s bills have fluctuated.
Once they go on to a tracker, they will be set for a two-year period.
What to do if you’re on a tracker or variable mortgage
Experts say that those on SVRs need to move on to better deals immediately if they can, adding those wanting certainty with their bills and currently opting for a tracker could consider fixing their mortgage.
David Hollingworth of L&C Mortgages said: “For those on SVRs it would be easy to feel comforted by a reduction but these are typically way higher than other deals and so are a costly place to be.
“Although tracker rates will come down as a result of the cut the best tracker rates on the market will still be higher than corresponding fixed rates.
“With interest rates expected to cut, fixed rates have been markedly lower than tracker rates. That margin will close if the base rate does continue to come down but the questions over how far and how quickly the Bank will cut rates have persisted. In the meantime tracker borrowers will have a higher rate to contend with so could still end up being more costly over the deal period.”
Mr Hollingworth said deciding whether to go on a tracker or a fixed deal would depend on attitude to risk, as tracker rates could fall but could equally rise if the Bank of England had to up rates in the future.
“Many will opt for the security that a fixed rate brings and prefer to know what they have to pay, rather than fretting over where rates may head next,” he said.
While standard variable rates were almost never a good deal, tracker rates might be taken by some customers who hoped for fixed rates to fall in the near future.
This is because a lot of tracker deals do not include exit fees for those who opt to leave them early.
“While trackers currently come at a higher cost, they offer flexibility that fixed rates do not. If the base rate falls sooner or faster than expected, tracker borrowers would benefit from lower monthly payments without needing to remortgage and price cheaper than current 2-year fixed rates,” said Nick Mendes of John Charcol brokers.
He added: “Many trackers have lower or no early repayment charges (ERCs), allowing borrowers to switch deals more freely if better options arise.”
But he said of SVRs: “These are typically several percentage points higher than even tracker rates, leading to significantly higher monthly payments. With no guarantee if there are rapid base rate cuts, remaining on an SVR could prove especially costly.”
The Bank of England base rate is currently 4.5 per cent after Thursday’s cut and financial traders are betting on around three more cuts this year.
But the situation can change rapidly.
If it appears that inflation is set to stay higher for longer, the Bank’s economists could opt to leave interest rates higher for longer, which would impact mortgage rates.
Read More Details
Finally We wish PressBee provided you with enough information of ( 700k households on variable mortgages face higher bills of £4,000 more a year )
Also on site :
- Country 'MVP' Refunds Entire Audience Mid-Concert and Fans 'Cannot Believe He Did That'
- With Property Seized and Federal Funding Uncertain, Montana Asbestos Clinic Fights for Its Life
- Trump fija nuevo plazo de negociación de dos semanas y desencadena esfuerzo urgente por reanudar las conversaciones con Irán