(Bloomberg) -- Britons are turning to floating rate mortgages that track the Bank of England’s key lending rate in a bet that policy makers will soon begin to slash borrowing costs.

The share of people seeking a “tracker” or variable rate loan when they buy a home or remortgage has more than doubled since a surge in borrowing costs ended an era of cheap fixed rate deals last year. 

Households are increasingly looking at variable deals rather than being locked in at a higher rate for several years, potentially signaling a halt to the long-term shift toward fixed rate deals in the UK. The move would also make the central bank’s rate decisions quicker to feed through to the economy. 

Some 1.7 million owner-occupiers who hold mortgages are still on tracker deals that are immediately exposed to Bank rate changes. But more could seek to switch, partly because the headline cost of trackers is lower and partly on a bet that the BOE will soon end its quickest tightening cycle in three decades.

For those remortgaging, about a fifth searched for variable rate deals in November and December, up from close to 5% a year earlier, according to Koodoo, which looks at data from its mortgage comparison platform used by price comparison sites. For those seeking to purchase a house, the share of searches for tracker deals jumped from 7% and 8%, respectively, in the final two months of 2021 to 24% and 21% a year later.

“You don’t want to lock in over 5% for five years,” said Andrew Wishart, property economist at Capital Economics. “People generally think that mortgage rates aren’t going to stay as high as they were in October and November for a long time. Certainly over a five-year period, the likelihood is that you will save money by being on a tracker.”

The shift in searches largely occurred in the second half of 2022, when turmoil following the aborted budget proposed by Liz Truss during her short term as prime minister and Bank of England rate increases pushed up mortgage prices. Investors expect Bank rate to peak at 4.5% this summer, and a small cut by the end of 2023 is now priced in.

Some Britons are turning to variable deals because they expect interest rates to peak at a maximum of 4.5%, according to Anthony Codling, a former Jefferies housing analyst who now runs property website Twindig. With fixed-rate deals still way above 5%, it makes more sense to opt for a fluctuating loan, he added.

“Over the next two to five years, increasing numbers of homeowners expect mortgage rates to fall,” Twindig’s Codling said. “They don’t want to lock into a rate today which might be lower in the future.”

The average two-year fixed rate home loan was 5.46% on Monday, according to Moneyfacts Group Plc. The rate has slowly declined after reaching a 14-year high of 6.65% in October.

In contrast, the average two-year tracker deal — a type of variable loan which typically follows interest rates —  was 4.39% on Monday, according to Moneyfacts. That means cheaper monthly payments for homeowners on a tracker deal — even after a lengthy BOE hiking cycle. 


“I’m sure it’s the fact that fixed rate mortgages have risen since the mini-Budget in response to rising swap rates,” said Tom Bill, head of UK residential research at Knight Frank.

“Over the last six to nine months that spread between the Bank rate and the variable rates has narrowed and I think that probably just makes it a more attractive choice,” Bill said. “In a penalty-free variable rate, you can go onto that as an interim measure in the knowledge that fixed rates are probably going to edge down slightly.”

Read more:

  • UK House Prices in Longest Slump Since 2008, Nationwide Says
  • UK Mortgage Approvals at 2 1/2-Year Low as Rate Rises Bite
  • UK House Prices at Risk of 10% Drop in 2023, Economists Warn
  • BOE Says 4 Million Households Face Higher Mortgages in 2023

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