What to do with your mortgage as interest rates drop to 4.25% ...Middle East

The Bank of England opted to cut interest rates to 4.25 per cent on Thursday in what could be good news for many mortgage holders.

The drop in rates was widely expected, and mortgage rates have been falling for weeks in anticipation.

But further cuts to interest rates are expected in the coming months, and many will be wondering what this means for mortgages and what decisions they should take as a result.

So The i Paper spoke to brokers to find out what action you should take.

If your mortgage is expiring now, you will need to get a new mortgage fix or a tracker deal, which follows the Bank of England base rate.

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If you do nothing, you will revert on to your lender’s ‘standard variable’ rate, which will be far more expensive than most other deals.

Generally, tracker deals are priced higher than fixed-rate deals, but they come down as the Bank of England cuts rates, which it is expected to do two or three more times in 2025.

With many trackers you also have the option to leave penalty free if cheaper fixed rates become available, whereas with fixed deals you are locked in to the rate and usually face exit charges if you want to end it early.

Elliott Culley of Switch Mortgage Finance explains: “Trackers have been poorly priced recently and fixed rates are far lower currently. They are also more risky as you can’t be certain the base rate will continue to fall, recent history provides evidence of this.

“As fixed rates work on a prediction of the market, they move more quickly than trackers. The main benefit at the moment to a tracker is most, will not have penalties to come out of them, so if you are thinking of moving or downsizing, this could be a better option.”

Nick Mendes of John Charcol brokers says that although there is a risk with trackers, as rates can go either way, those who are comfortable with that risk can get lower payments.

“While these deals may not always look cheaper at the outset, they can become more cost-effective if rates fall more quickly than expected,” he says.

What to do if your mortgage fix ends this summer

If your mortgage is expiring later this summer, you can act now to secure a cheap rate in advance.

If rates get cheaper, you can often switch onto a cheaper deal before your current one expires.

Recently, most lenders have let you lock in a rate six months in advance of your deal expiring, though this has recently reduced.

“The timescales most lenders now offer take a new deal has moved from a six-month window to three or four months, as the markets have become more settled,” explains Justin Moy of EHF Mortgages.

Even though most mortgage brokers expect rates to continue to fall, they stress that locking in a rate now can still be worth doing.

“While rates are on a downward trajectory, there is no guarantee that today’s deals will still be available in a few weeks or months. Markets can move quickly, and lender pricing can change with little notice,” says Mr Mendes.

What to do if you are in the process of buying a home

If you are in the position of looking at homes to buy, you cannot lock in a rate yet, but experts say it is worth you following where rates are and establishing how much you can borrow.

“Buyers need to first establish the borrowing power before they look for any property, to make sure that the mortgage is affordable,” says Mr Moy.

Mr Culley adds: “It’s good to get an idea of rates at the start of the process, but you can’t lock in a rate until you have an offer accepted.

“General advice would be to apply as soon as your offer is accepted, but if we know rates are improving you can wait a couple of weeks before applying. You can amend your rate with the lender post application as well, if rates continue to improve.”

Beware that if you are a buyer that has a small deposit, you often won’t have access to the cheapest deals on the market.

For those with deposits of just 10 per cent, rates are generally well above 4 per cent.

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