Many of the 400,000 households who took out two-year fixed mortgages last year hoping that rates would have fallen significantly when they came to renew are set to find themselves paying effectively the same price.
The warning signals the major challenge Prime Minister Sir Keir Starmer and his Chancellor Rachel Reeves face when it comes to meeting their pledge of making voters feel better off by the end of this Parliament.
But many of them look set be disappointed, with interest rates – and therefore mortgage rates – having fallen less dramatically than was expected at the time.
But brokers say they expect some customers who took the shorter option will regret doing so.
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Nick Mendes, mortgage technical manager at John Charcol brokers said: “At the start of 2024, mortgage rates fell to as low as 3.89 per cent for remortgages, offering a sense of relief to borrowers after a period of rapid rate hikes.
“Right now, the outlook suggests that while rates are likely to fall, it will be a slow and measured process rather than a sudden drop. This reinforces the idea that borrowers should be cautious about relying too heavily on market predictions when making financial decisions.”
But this did not transpire. After a dip last year, inflation remains well above the Bank of England’s target level of 2 per cent and instead rates stand at 4.5 per cent today after the Bank of England opted to hold them at its March meeting.
The OECD suggested this week that rates will still be at 4 per cent at the end of 2025.
Robert Wood, chief UK economist at Pantheon Macroeconomics, said: “We expect the Bank of England Monetary Policy Committee (MPC) to lower rates by 0.25 percentage points in May and November.”
Interest rates and predictions for where they will go in future have a major bearing on mortgage pricing, and therefore the slower-than-expected reduction has meant home loan costs have not gone down as quickly as was previously predicted.
“When you add those on top of the higher rate they’ve paid for two years, I suspect many will look back in hindsight and wish they’d opted for a longer fixed rate as they likely would’ve had a better rate, fewer fees, not to mention the faff of renewal and anxiety of mortgage rates on their minds, rather than accepting this is where we are and getting on with their lives.”
“It shows that trying to play the markets is fraught with danger and I would always say it is best to take action when it is best for you and affordable to do so, rather than waiting.”
In the two years preceding this, the proportion taking out shorter deals was much lower.
Those who took out the two-year deals in 2024 will have been paying far more each month than those who took longer deals on the whole.
Based on these figures, someone with a £200,000 mortgage would have been paying £46 per month more if they opted for a two-year rather than five-year deal.
David Hollingworth, associate director at L&C Mortgages , said: “There was already talk of falling rates in early 2024 which saw a drop back in mortgage rates in anticipation. Many borrowers will have decided that a shorter-term deal could leave a window to get a better rate after two years if interest rates did fall.”
“A lot can happen in a year and the hope will be that those borrowers will have the chance to choose from a more stable market”, he said.
The warnings come amid reports that the Financial Conduct Authority, the Prudential Regulation Authority are among the regulators that have been summoned to Whitehall to discuss plans to cut mortgage red tape with the Chancellor.
Among the topics being discussed is how it can be made easier for customers to remortgage with a new lender.
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