© Provided by The Telegraph house mortgages variable rate affordability
Borrowers are betting that interest rates will not rise as much as expected, with home buyers turning to variable-rate mortgages in an attempt to reduce their monthly repayments.
The average two- and five-year fixed rates are now 6.16pc and 6.07pc, up from 2.34pc and 2.63pc in December last year, according to the analyst Moneyfacts. Meanwhile, the average two-year tracker stands at 3.73pc, up from 1.58pc.
The difference between repayments for the cheapest variable and fixed loans can be hundreds of pounds a month. The lowest variable deal on the market from Newbury Building Society offers a 2.34pc initial rate for three years, then 4.45pc, according to the broker London & Country. The cheapest fixed deal was from Halifax, at 4.5pc.
For a borrower with a £125,000 loan, the variable deal costs £551 a month, a £144 saving compared to the fix.
A rising number of borrowers are taking a gamble by shunning fixed-rate deals, Aaron Strutt, of the financial advice firm Trinity Financial, said.
“Variable deals are the cheapest on the market at the moment,” he said. “The market expects interest rates will rise much further so we are now stuck with fixed mortgages as high as 6pc.”
However, while variable rates are currently more affordable on a monthly basis, they would leave homeowners vulnerable to future rises in the Bank Rate. Fixed rates charge a premium for the comfort of knowing payments will remain the same regardless of decisions by the Bank of England, experts said.
Market expectations suggest the Bank Rate could peak at 5.75pc next year, but borrowers rushing into variable deals are effectively betting it will not rise by as much as predicted.
Mr Strutt said the large number of variable loan applications meant that many smaller building societies – which typically offer the most competitive variable deals – were being forced to pull offers from the market.
Jane King, of the broker Ash Bridge, said for homeowners with smaller mortgages it could be worth considering a variable loan. “If you are prepared to take the risk of rates going up over the next couple of years, it might be worth it,” she said. “Because variable deals are so much cheaper, it could mean a difference of hundreds of pounds.”
Ms King said six months ago none of her clients would have asked about variable deals. “The market has changed that quickly,” she said. “Now they are at the very forefront of people’s decision making.”
This comes as Halifax warned rising mortgage rates would have a significant negative impact on house prices. The average price for a home dropped 0.1pc during September, according to the lender, to £293,835. The pace of annual growth slowed for the third month in a row to 9.9pc, it said, returning to single digits for the first time since January.
Kim Kinnaird, director of Halifax mortgages, said house prices had effectively been flat since June, suggesting the market was already feeling the effect of higher rates.
“While stamp duty cuts, the short supply of homes for sale and a strong labour market all support house prices, the prospect of interest rates continuing to rise sharply amid the cost of living squeeze, plus the impact in recent weeks of higher mortgage borrowing costs on affordability, are likely to exert more significant downward pressure on house prices in the months ahead.”