Yahoo Finance Interest rates: A guide to 'mortgage hopping' to get the best deal for your property
Is moving onto a variable rate with the intention of securing a lower fixed rate mortgage in the future a good tactic?
What is ‘mortgage hopping’ and what are the advantages of doing it?
The tactic of ‘mortgage hopping’ involves going onto a variable rate mortgage, such as a tracker or discounted rate, with minimal fees, with the intention of ‘hopping’ onto a fixed rate mortgage in the future when the interest rates on these products are lower.
Banks use the base rate set by the Bank of England when determining their fixed rate mortgage products. If this rate is rising, then so will their fixed rate products but if they cut the base rate, mortgage products also reduce.
When you take out a fixed rate, you’re fixing in at that rate for two, three, five or sometimes10 years. To exit this rate before the end of your fixed period usually involves a hefty early repayment charge so you want to make sure you get a good rate at the time of fixing.
Variable rate mortgage products, in contrast, usually have lower exit fees and are more flexible so, if you think the base rate is going to come down, you can take out a variable mortgage and swap onto a more stable fix rate mortgage when interest rates reduce to a lower level.
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“The decision between fixed or variable has evolved over the last 18 months as interest rates have risen. While rates were low for a decade it was a relatively straightforward decision [to fix],” says Felicity Holloway, head of mortgages at Moneybox. “[Now] the key decision is whether you value the certainty of a fixed rate or whether you are willing to deal with the uncertainty of a tracker mortgage in the hopes it will be cheaper over the mortgage term. A good broker can put personalised numbers around these options and help you make the right decision for your circumstance.”
What should you be aware of?
While there may be benefits to mortgage hopping, it can be a risky tactic so there are certain things you should be aware of.
“It is important to choose a variable type mortgage with no early repayment penalties or one with very low penalties otherwise you may incur a large cost when you redeem the mortgage which could be expensive and mitigate the interest rate savings you are trying to make with this strategy,” says Adrian Anderson, director of Anderson Harris. “Most banks will charge a ‘product fee’ for you to access their cheapest rates. These can typically vary from £499 to £1,999 (sometimes more) hence this 'cost' needs to be factored in.”
It’s also important to remember that you will be doubling the amount of work involved as you’ll be getting two mortgages, rather than just one. Plus, you’ll have to constantly monitor the fixed rate mortgage market while you’re on the variable rate (or have a broker who will do it on your behalf) so that you know when the time is right to switch products.
“A not insignificant factor is the hassle involved. You need to arrange the variable rate mortgage, consistently assess the fixed rate market and then subsequently arrange a fixed rate deal when you feel the time is right, all of which is time consuming,” says Hoffman. “Each application you do is a new credit check, so if you are hopping from variable to fixed you will need a new credit check each time so this is something to consider if you do not have a strong credit rating.”
Who does this approach best suit?
Due to its risky nature, mortgage hopping isn’t going to suit everyone but, even taking this out of the equation, there are some people who would benefit from this tactic over others.
“This strategy is more suitable for larger loans, as every 0.01% saved translates into greater monetary savings. For smaller loans, it can be difficult to justify the set-up and exit fees, as they represent a larger percentage of the overall loan costs,” says Richard Campo, founder of Rose Capital Partners.
There also needs to be a certain amount of stability in a client’s own personal circumstances for this tactic to work. “It is also important to consider the client's future plans. If they intend to switch to a lower-paying job, have children, or increase their expenses, this approach may not be suitable. Life is unpredictable, and even if the future appears promising, unexpected events such as job loss or changes in personal circumstances could jeopardise the client's ability to change lenders,” he adds.
Conversely, if your change in circumstances involves a big cash injection, mortgage hopping may be a sensible tactic as fixed rate mortgages only allow you to pay a certain percentage off every year.
“If the borrower has a capital event approaching (such as a bonus or inheritance) that will allow them to pay down the debt beyond the constraints typical on a fixed rate, then this might make sense,” says Mark Harris, chief executive of SPF Private Clients.
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Mortgage hopping is also made considerably less stressful if you have a large disposable income which can absorb rate increases and unexpected shocks to the system. “This strategy will most likely suit those borrowers with a lower loan to value and a higher attitude to risk who have a decent level of disposable income,” says Anderson.
If you decide to mortgage hop, when should you do this?
If you decide that you want to opt for this tactic, the next decision to make is when exactly you decide to hop. Go too early or too late and you might miss out on potential savings so how do you know when’s the right time to swap your variable rate for a fixed?
“There is a break-even point at which it makes sense to switch mortgages, but predicting this point requires some speculation about future market conditions. For instance, if you're currently paying a 4.5% rate on a tracker mortgage (0.25% + BBR), and a 5-year fixed rate drops to 3.5%, it may be the right time to switch if you don't expect the base rate to fall below 3.25% during the remaining tracker period,” says Campo.
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“Rather than adhering to a strict timeline, it's essential to monitor these break-even points and inform clients when they are near or have reached them. On the other hand, if there's a general sentiment that rates may rise, it may be prudent to abandon the tracker mortgage and secure a fixed rate, as long as the new fixed rate is lower than the current rate.”
While no one can predict the future, a good broker will present you with the options and help you decide if you’ve maximised the benefit of being on a variable and now’s the time to ‘hop’.
Alternatives to mortgage hopping
Most people don’t have the disposable income or nerve for mortgage hopping but that doesn’t mean you have to play it 100% safe with your mortgage choices.
“One trend we are seeing is borrowers taking a shorter-term product, such as a two-year fix, with the view to taking a longer-term product in 2025 when hopefully rates will be lower. Not only may the mortgage market be more attractive at that time, but the overall outlook of the economy could be stronger too,” says Harris.
In the current climate, whether you decide to mortgage hop or not will depend on what you think is going to happen to mortgage rates and whether your own circumstances and personality allow for this level of risk.
As Campo explains: “The decision ultimately comes down to balancing risk and reward, as no one can predict the future with certainty. As the saying goes: ‘Those who live by the crystal ball are destined to eat glass.’"
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