UK mortgage rates rollercoaster is the price to pay for cheap, short-term deals

As mortgage lending rates surge to levels not seen since the banking crisis, some borrowers are wondering whether there is something to be said for the certainty of fixing the borrowing rate for the full term of the loan.

In 2007 two of the UK’s biggest lenders launched 25-year fixed-rate mortgages. They were responding to a call from the then chancellor, Alistair Darling, who suggested consumers would be better off if they did not have to find a new deal every two years, typically paying charges each time.

 

The rates were not especially high for the time: Halifax and Nationwide both charged 6.39% on their deals, the Bank of England base rate was 5% and, according to data from Moneyfacts, the average two-year fixed-rate was 6.24%. Nevertheless, there was not exactly a stampede at either lender’s branches. Nationwide would not say how many it sold, only that “historically, take-up of 25-year fixed mortgages has been low, with borrowers preferring the flexibility of shorter-term deals of two- to five years”.

In the intervening years, those who opted for a short-term fix will have felt vindicated. When the banking crisis hit in 2008, the Bank of England’s response was to start slashing interest rates. Borrowers on variable-rate mortgages benefited immediately, but as low rates became the norm, those coming off fixed-rate mortgages were able to get cheaper and cheaper deals.

By 2020, when the cheapest two-year fixed rates were below 1%, a borrower who had opted to ride the rollercoaster of rates would have made huge savings, offset only in part by any fees they paid along the way. On a £150,000 mortgage, for example, monthly repayments would have been £1,003 on a rate of 6.39% – but £554 on the 0.83% that was on offer from Halifax two years ago. (Over 25 years, a borrower on the higher rate would have paid £300,757; the borrower on 0.83% would have paid £166,152, had that rate continued for 25 years.)