There are reports that interest rates may have peaked as the inflation rate is falling. So, if you’re looking for a new mortgage, does that mean you should choose a variable option? Read on to discover some of the factors you might want to consider.

With a variable-rate mortgage, the rate of interest you pay can change during the term. So, if interest rates fall, you’d benefit from a lower rate and, as a result, your repayment would fall too.

Alternatively, if you choose a fixed-rate mortgage deal, the rate of interest you pay would remain the same for a defined period, even if interest rates fell.

There’s speculation that the Bank of England will cut its base interest rate in 2024

The Bank of England (BoE) has increased its base interest rate over the last couple of years to try and reduce high levels of inflation.

The BoE has a target of keeping inflation at 2% a year. The Covid-19 pandemic led to a large shortage of products and services, and then sudden demand for them, which pushed up prices. This was exacerbated by Russia’s invasion of Ukraine, which had a huge effect on the cost of food and energy.

It led to inflation rising far above the 2% target over the last couple of years – it reached 11% in 2022. One of the ways the BoE can try to reduce the rising cost of living is by increasing interest rates. This discourages both household and business spending to bring prices down.

The rate of inflation has been falling, although it is still above the target. According to the Office for National Statistics, in the 12 months to December 2023, the rate of inflation was 4%.

The BoE expects inflation to slow and be back to “normal levels” by the end of 2025.

With inflation easing, there’s speculation that the BoE will start to gradually reduce interest rates, potentially as soon as this year. If you’re taking out a mortgage, it could affect which option you choose.

A variable-rate mortgage could mean you benefit from interest rate cuts sooner

If you believe interest rates may fall, a variable-rate deal could make sense as you’d benefit from rate cuts much sooner.

Taking out a variable-rate mortgage at a time when interest rates are falling could improve both your short- and long-term finances.

Let’s say you borrow £200,000 through a repayment mortgage over 25 years. With an interest rate of 5%, your monthly repayment would be £1,170. If the interest rate fell by just 1%, your monthly repayment would decrease to £1,055.

Over the full term of your mortgage, a lower interest rate could save you thousands of pounds.

On the flip side, the BoE could raise interest rates further. If it did so, your repayments on a variable-rate mortgage would also increase. Considering how you’d cope financially if interest rates were to rise could help you understand if a variable-rate option is right for you and give you confidence in your decision.

A fixed-rate mortgage could be right for some homeowners

While some experts believe interest rates could fall soon, there’s no guarantee that they will.

When you’re comparing mortgage options, it’s important to consider what makes sense for your financial circumstances. For some homeowners, knowing how much their mortgage repayments will be every month by choosing a fixed-rate mortgage could be more valuable than potentially accessing a lower rate of interest in the future.

If you believe interest rates could fall but want the security of a fixed-term mortgage, you may want to choose a short-term deal. It means you could remortgage sooner and take advantage of a potential rate fall.

So, it could be worthwhile reviewing all your options to understand what’s right for you.

Contact us to discuss your mortgage options

If you’d like to talk about the different mortgage options and which ones could suit your needs, please contact us. We’re here to help answer your questions and provide guidance when you’re searching for a mortgage.

As mortgage brokers, we could support you in finding the lender that’s right for you and may be able to secure you a competitive interest rate. Please contact us to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.