One in five remortgage borrowers consider variable rate to avoid payment shock

Around one in five remortgage borrowers were considering variable and tracker mortgages in September while first-time buyers’ interest in variable rate products collapsed, new Money Facts analysis has found.

The data in September, 21% of remortgage borrowers researching mortgages on Moneyfactscompare.co.uk were considering variable or tracker mortgages, compared with 14% in July. Whilst  7% of homemovers researching mortgages on Moneyfactscompare.co.uk were considering variable or tracker mortgages, compared with 6% in July.

Meanwhile, 12% of first-time buyers (FTBs) were considering variable or tracker mortgages, compared with 31% in July.

Adam French, Head of Consumer Finance at Moneyfactscompare.co.uk, said “Higher rates are changing borrower behaviour, with around one in five remortgage borrowers researching mortgages on Moneyfactscompare.co.uk considering a variable or tracker mortgage in September, up from a more typical 13 to 14%. It shows a growing number of remortgage borrowers are increasingly prepared to take on some interest rate risk in return for keeping their initial mortgage costs down by looking to variable and tracker rates.

“For someone coming off a very cheap fixed-rate deal, the payment shock can be substantial. A borrower with a £250,000 mortgage over 25 years who secured a five-year fix at 2.38% in 2021 would have been paying around £1,106 a month. Remortgaging today onto an average two-year fix at 5.93% would push that to around £1,600 – almost £500 more every month.

“At an average rate of 4.54%, a tracker can soften that immediate hit. The same mortgage would cost around £1,395 a month which is roughly £200 less than the average two-year fix. But that saving comes with the trade-off that the payment can rise if the Bank of England increases the Base Rate.

“This is a gamble given current rate expectations. If base rate rises as markets expect, tracker borrowers will see their monthly repayments increase, eating into the saving they are making today. Anyone considering a variable mortgage therefore needs to stress-test their budget rather than simply looking at the initial saving.

“First-time buyers have moved in the opposite direction with the proportion of FTBs researching variable and tracker mortgages falling sharply, from 31% in July to 12% in September. It may be that, as the mortgage market has become more volatile, many aspiring buyers have become less willing to take on the uncertainty of a variable rate.

“The calculation is different for remortgage borrowers facing a big jump in their monthly payments. They may be more willing to accept some uncertainty if it gives them a chance to avoid the full extent of that payment shock. But a lower initial payment should not be confused with a guaranteed saving over the life of the mortgage and borrowers need to be confident they can still afford the loan if rates move higher.”