Mortgage holders who took out short term fixed deals in 2024 are set to be dealt a fresh blow as they will likely save “virtually nothing” next year when they refix, experts have warned.
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.
This cohort saw their bills jump by hundreds of pounds a month when mortgage rates started to soar in the wake of Liz Truss’s 2022 mini-Budget.
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.
In 2022 and 2023, five-year fixed mortgages have been more popular than the main alternative – two year deals – but in 2024, the proportion of borrowers opting for the shorter type rose, with many banking on seeing costs drop by the time they came to renew in 2026.
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.
Two-year fixes were significantly more expensive than five-year deals throughout 2024, but many took shorter terms in the hope they would save money overall by refixing at an even lower price two years later.
But brokers say they expect some customers who took the shorter option will regret doing so.
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At the start of 2024, deals below 3.9 per cent were available for those with the largest deposits or equity in their home, and on current forecasts, mortgage experts do not expect rates to be significantly below this at the start of 2026.
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.
“But as we look ahead to 2026, those who locked into two-year deals back then may not see the meaningful reductions they had hoped for. In fact, they could find themselves facing rates that are only marginally lower – or in some cases, virtually the same.
“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.”
At the start of 2024, most economic forecasters were expecting multiple cuts to interest rates. Rates at the time stood at 5.25 per cent, and some economists were predicting they could reach as low as 3.75 per cent by the start of this year.
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 Bank noted an “intensification in global uncertainties” in its meeting notes published alongside its decision to hold rates.
The OECD suggested this week that rates will still be at 4 per cent at the end of 2025.
And some economists even believe there is a risk that rates could even be cut just once more this year.
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.”
But he added that of several other possible scenarios, a scenario that was “consistent with the MPC holding rates for the rest of the year after a cut in May” was the “most likely”.
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.
Lewis Shaw, owner and mortgage broker at Shaw Financial Services said: “The assumption [amongst those who took out two-year deals last year] was that rates will fall and they’d be able to lock into a more competitive mortgage. However, rates are taking longer than people thought to reduce and when taking out shorter mortgage products, many can forget to factor in the cost of renewal, such as legal and booking fees.
“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.”
Andrew Montlake, managing director at mortgage brokers Coreco, said: “Anyone looking at waiting to see if mortgage rates will get markedly better is likely to be disappointed and even if the Bank of England cuts again, we don’t expect mortgage rates to dramatically fall, especially with inflationary pressures still there.
“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.”
According to UK Finance data, 911,700 households took out new mortgage deals in 2024, with around 414,100 of these (45 per cent) taking five year deals and 392,700 (43 per cent) taking out deals of two years or less.
In the two years preceding this, the proportion taking out shorter deals was much lower.
In 2023, just 34 per cent of borrowers took deals of two years or less, and in 2022, the figure was even lower at 28 per cent.
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.
At the start of 2024, the average rate on a two-year deal was 5.93 per cent according to Moneyfacts, whereas for a five-year deal, this was 5.55 per cent.
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.
They would have known this at the time, but hoped they would make savings when they renewed, whereas those on five year deals would be locked into paying their rate until 2029.
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.”
But Mr Hollingworth gave some hope to borrowers by pointing out that it was still possible economic conditions could change, and that their hopes may be realised.
“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 good news is that lenders are competing hard so if there is a chance to cut rates then I’d expect to see lenders continue to pass on those improvements to borrowers. Over time we should see better options for borrowers as they come to the end of their deals but the days of the ultra low rates look long gone,” he added.
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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