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Why higher mortgage rates mark a return to normality

Why higher mortgage rates mark a return to normality
(Luke MacGregor/Bloomberg)

Fixed rate mortgages have begun to fall after reaching 6 per cent last year, but remain relatively high, but with the prospect of falling interest rates, some are questioning whether borrowers may revert to tracker mortgages.

When compared to January 2021, the average two-year fixed rate has more than doubled from 2.52 per cent to 5.79 per cent, according to Moneyfacts.

Tracker mortgages, meanwhile, have become more popular. Accord Mortgages, for example, launched a new range in December, responding to what it described as increasing demand for variable rate mortgages.

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“Whereas fixed rates have typically represented 95 per cent of our mortgage business, the split has shifted over recent months. Since October 2022, on average 12 per cent of our new lending has been on tracker products,” says Jeremy Duncombe, managing director of Accord Mortgages.

“As rates have stabilised, we have seen fixed rate popularity start to increase again, but tracker popularity is still above what we saw earlier last year.

“We anticipate that this picture is likely to continue for as long as a degree of uncertainty remains, and until borrowers feel that rates have levelled out to what they might consider to be a ‘new normal’.”

But how much can we expect rates to fall?

Average rates

Two-year fixed (all LTVs)2.52%2.38%5.43%6.01%5.79%
Two-year tracker (all LTVs)2.37%1.75%3.77%4.03%4.48%
Standard Variable Rate4.41%4.41%5.63%6.40%6.64%
Data shown is as at the first available day of the month. Source: Moneyfacts Treasury Reports

Although lenders such as Accord and NatWest have cut rates this month, some in the mortgage industry predict that higher rates should be considered the norm.

“Speaking to our brokers across the country, a big part of their role last year was educating clients, especially many younger buyers who only know ultra-low rates,” says Carl Parker, national director at Just Mortgages.

“This will continue in 2023, as I think it’s safe to say we won’t return back to those days. Borrowers should expect rates between 3 and 5 per cent to become the ‘new normal’ moving forward.”

It is not just borrowers who are having to adjust their perception of rates. “There are a number of advisers in our market that haven’t actually advised on a tracker rate mortgage ever, because we’ve had such a benign environment for so long,” says Danny Belton, head of lender relationships at Legal & General Mortgage Club.

“These are new learnings for a lot of people; and [for] customers, if you’ve only had a mortgage for 10 or 12 years, you may not have even considered [trackers] because fixed rates have been so cheap.”

Hina Bhudia, partner at Knight Frank Finance

Knight Frank Finance partner, Hina Bhudia, agrees both parties will need to adjust. “Advisers and borrowers will need to come to terms fast with the fact that rates are not going to be at the record lows we have enjoyed for some time.

“Historically, the base rate has sat at around the levels we are seeing today. We are moving into a phase of more normal market conditions when it comes to the cost of debt, rather than an uncharacteristically low lending environment.”