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With mortgage rates falling and talk of a price war between lenders (see video in the middle of this post), the Money team has spoken to top mortgage brokers to find out what options the 1.5 million households due to re-mortgage this year have.

HSBC became the latest high street lender to cut its fixed rates last week, offering a five-year fixed for less than 4%. 

Its move was “notable in that its rates are on offer to those borrowers looking to re-mortgage, a departure from the recent trend of pricing favouring homemovers”, says David Hollingworth, an associate director at L&C.

With people now coming off deals secured in the ultra-low rates era, most will face an uptick in monthly costs, but some of the “sting” is being brought out of the market, he says.

Let’s rewind – why are mortgage rates falling?

December’s inflation figure of 3.9% was lower than expected. Given interest rates are hiked to control inflation (by encouraging people to spend less and save more, so prices go down), this has led markets to price in earlier reductions to the Bank Rate – with analysts now predicting the first cut in early summer and rates bottoming out at 3% next year.

Swap rates – which in simple terms predict future interest rates – have now “settled”, says Kevin Roberts, managing director at Legal & General Mortgage Services.

This has laid “the groundwork for a more stable ‘new normal’ in mortgage pricing” which “creates exciting inroads for people to take advantage of these lower rates over the coming weeks and months”.

What options do people renewing have?

Broadly there are four routes people can take, according to Hollingworth.

1. Allowing your mortgage to automatically drop on to your lender’s Standard Variable Rate (SVR) for a few months to see if rates drop further – then securing a lower fixed rate than currently available.

However, SVRs are often in excess of 8%, so even if fixed rates do drop a little more, borrowers risk paying much more in the meantime by loitering on the SVR.

2. Trackers follow the Bank Rate (currently 5.25%) plus a fee, often an additional 0.5%. So if markets are right and cuts are on the way, mortgage payments will reduce. 

There are a few things to consider, Hollingworth says.

First, people need to have some capacity to deal with higher payments if rates don’t come down – or climb again.

Next, “as base rate has yet to move, the initial rates will be higher than corresponding fixed rates”.

3. Tracker – but switch to fixed when you think the moment is right. Many trackers can be found without any early repayment charge, so you could take one hoping to follow rates down and then switch to a fixed deal when you think/hope rates have bottomed out.

This comes with the same caveats as number two plus, Hollingworth says, “there’s also potential to end up paying an arrangement fee to switch to a tracker and then another to move to a fix at a later point… that could erode any benefits.”

4. Shop around for best fixed rate. This is the route Hollingworth expects a majority to take as things stand. As discussed, competitive rates are now on offer to people re-mortgaging as well as home buyers.

At Legal & General, Kevin Roberts says several mortgage lenders will start to offer appealing product transfer rates six months before the current deal expires – these can be locked in with the knowledge that the rate can be adjusted if the market moves.

It is also important that people factor in fees here.

In summary?

“The era of ultra-low interest rates is probably over for the foreseeable future,” Roberts says. “Adapting to the new normal is key. 

“Homeowners must take a forensic approach, exploring all available avenues on the length of a new mortgage term, capital repayment plans, and the possibility of switching from their current lender, if appropriate. 

“Ultimately, everyone should seek independent mortgage advice, wherever they stand on the property ladder. 

“Advisers are best placed to guide buyers toward the optimum solution for their individual needs and circumstances, and an adviser can normally source offers not available directly to borrowers.”