Why higher mortgage rates mark a return to normality

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.

“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.

Rates are not going to be at the record lows we have enjoyed for some time.Hina Bhudia, Knight Frank Finance

“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

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.”

They are higher rates but in the scheme of things, they are not high rates.Danny Belton, Legal & General Mortgage Club

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.”

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.”

“We were in an extremely low rate environment for a long, long time,” says Belton at Legal & General, who notes how today’s rates are comparable to ones available when he first became a mortgage borrower.

“We’d just come off a period – that I missed fortunately – when rates went up to 15 per cent or so,” he says, with rates subsequently moving around the 4 to 6 per cent mark for many years.

“Where we’re actually getting back to is yes, they are higher rates but in the scheme of things, they are not high rates. They are more market median rates for where we’ve been used to.”

And while Belton predicts a smaller market this year for acquisition business, and lenders therefore competing on rates to meet lending targets, he still does not expect a “massive drop” in prices.

Will trackers become part of the new normal?

So with higher mortgage rates predicted to become standard, does this open the door for cheaper trackers to make a comeback among borrowers?

“Tracker mortgages will certainly become a more attractive option, especially if inflation does begin to ease and the Bank of England can scale back on raising interest rates,” says Parker at Just Mortgages.

“If the base rate does peak later in the year and start to come back down as many economists forecast, trackers will present a strong proposition to borrowers.”

There are a number of advisers in our market that haven’t actually advised on a tracker rate mortgage everDanny Belton, Legal & General Mortgage Club

But for risk-averse borrowers, Bhudia at Knight Frank Finance says fixed rate mortgages are the way to go. “By taking out a tracker, borrowers are trying to guess what the market is going to do.”

And with the cost of living crisis affecting many households, working within budgets is critical, says Karl Wilkinson, chief executive of Access Financial Services. “Many will want to know their monthly expenditure without exposing themselves to the risk of further rises in interest rates.”

Parker at Just Mortgages also highlights the benefit of certainty that a fixed rate can provide. “As homeowners look to manage every penny in the current climate, there’s still a lot to be said for the certainty of a fixed rate, even if it comes at a premium.

“While there will be those homeowners who fix and hate the thought of ‘losing money’ if rates drop, there will always be those who did their budgets, worked out what they can afford and are happy to see the same amount leave the account every month.”

Chloe Cheung is a senior features writer at FTAdviser