Should I wait for a lower rate?

Recent research carried out by our Insights team found a new mortgage search term had gained a lot of popularity in Q3. It’s one we hadn’t heard before – “mortgage FOMO”. 

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If you’re not familiar, it’s colloquial internet speak – mortgage + “fear of missing out” – but it abbreviates a question as old as time. 

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“Should I wait for rates to fall before I lock in?” 

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This got us thinking about choosing the “right rate” – and why this question appeals at all. 

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The interest rate news cycle

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Interest rates have been in the headlines a lot over the last few years.

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Through the pandemic, rates increased. They increased even more following Liz Truss’s mini budget. Then, they stayed reasonably high – until recently. This summer, the tides finally turned and rates began to fall.

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This was a welcome change for aspiring buyers and for homeowners looking to lock in a new rate. (Another popular search term is “mortgage time bomb”, referring to homeowners forced to switch from 2% rates to 6% rates as their fixed terms ended.)

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With each decrease in rates, headlines would follow. How low will rates go?

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This trend brought about a strange dynamic. Rates were falling, but people were still reluctant to lock in.

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Why? In case rates fell further and they missed out. 

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The legacy of 1% mortgage rates

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This dynamic exists in part as a result of those days when one could lock in a 1% or 2% interest rate for their mortgage. 

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The memory of these 1% rates linger today in the public consciousness. Maybe, just maybe, they’ll come round again. 

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To be fair, lower interest rates are pretty much always better. So it makes sense that if a lower rate is guaranteed, one might consider holding out.

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But that’s the thing: rates are never guaranteed.

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And the possibility of locking in a lower rate can blind people to another painful reality: rates may go down, yes, but they may also go back up.

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The risk of waiting for rates to fall

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As rates began to come down this year, people got excited – cue FOMO – hoping, if not truly believing, that very low rates were on the horizon, and then they’d lock in. 

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But in the few weeks before the Autumn Budget, as rates ticked back up, those who held out found themselves facing a frustrating reality: it’s possible that the lowest rates this year may have been and gone. 

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So why is it so hard to gauge the best time to lock in a low rate?

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Partly because of how mortgage rates are set.

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Mortgage lenders use the swap rate as a reference when they set their interest rates. The swap rate represents the cost at which lenders can borrow funds for the duration of the entire mortgage term. (Jargon, sorry.)

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The swap rate is impacted by a bunch of different economic factors like inflation, and they’re impossible to predict. But when the swap rate moves, most lenders will have to move their pricing, too. 

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That’s what has happened over the last few months. Earlier this summer, positive inflation and employment data brought about an optimistic outlook. The swap rate fell and interest rates followed suit.

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Conversely, ahead of the Autumn Budget, the market got a bit nervous. The swap rate went up and rates did too. 

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These cycles happen all the time, and it’s impossible to know if lower rates are ahead – or if borrowers have already missed their chance to lock in the year’s (or the decade's!) lowest rates.

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Extra risk for homeowners

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But the risk of waiting for rates to come down in the future isn’t just the possibility that you miss out on the cheapest rate. 

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If you’re a homeowner and you wait too long to lock in your next fixed rate, you may wind up on your lender’s revert rate. This is almost always a few percentage points higher than the market average.

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That’s you, out of pocket. 

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So if a lower rate is always better, but there’s no way to predict when the lowest rate has arrived, what are you meant to do?

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Knowing when to lock in a rate is actually pretty simple

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Mortgage rates are unpredictable and they always will be. So what should you do?

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It’s simpler than headlines would have you believe. 

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First, decide on your priorities and figure out what you can afford. Think about overpayment terms, fixed term length, and portability. You don’t need to do this alone – speak to a broker for help deciding what is right for you. 

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Then, armed with that expert advice, lock in a fair rate you can afford. It's that simple.

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No more waffling or delaying or worrying you’re missing out.

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The future is unpredictable, and waiting for a lower rate that may never come could cost you. 

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But if you’re realistic about what you can control and take expert advice, you can be confident you didn’t miss out on anything.

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The news can be liable to seize on interest rates because they tap into anxiety around the very real housing crisis this country is facing. 

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But this frenzy can make things seem more complicated – or more in your control – than they actually are. 

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When it comes to your rates, the answer is almost never so complex. Ignore the headlines, get advice from an expert, and lock in a fair rate you can afford – and never suffer from mortgage FOMO again. 

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The not so fine print: this article is intended for informational purposes only and should not be taken as any kind of advice or endorsement. Speak to your own mortgage broker to decide what is best for you. If you stop paying your mortgage, you could lose your home.

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