“This two year fixed mortgage seemed like a good idea two years ago…”
Like the majority of homeowners in the UK I tend to go for two year fixed rate mortgage deals. I’ve spent the last few months wishing I’d taken a longer term and the last few days wondering why so many of us go for the two year fixed option.
In my case it’s part habit, part instinct – mostly because my first ever mortgage, a fancy stepped discounted variable rate deal over four years turned out to be something of a millstone. I suppose I was so seduced by the word discount and the ridiculously low first year payments that the stepped and variable bits didn’t really register. Yes, I realised the payments would go up each year, but I would worry about that later.
The following four years brought a steady stream of letters from my lender gleefully informing me of rate increases, partly because interest rates were steadily heading north at the time and partly because of that stepped deal. I spent the last two years of that deal counting the days until I could find myself a bit of a bargain (relatively speaking) and something a bit steadier.
Hey presto, two years fixed has been the mainstay ever since. Getting one is a pretty standard process. Find the best rate you can, secure it early in case the Bank of England should put a spanner in the works at the wrong time, then spend one year feeling smug at dinner parties and another one panicking every time someone on the news says the words ‘quarter point rise’.
That’s the point about two year fixed deals. They are part bargain hunter, part low risk. You want to get a good deal and tie it down for a couple of years, but no longer. After all, interest rates could be lower in two years and, at that point, you’d feel like a bit of a mug if you still have two or three (or more) years to go on a two year old deal, wouldn’t you?
Of course, that logic is symptomatic of a kind of one-eyed, short sighted financial optimism at which we Brits excel. It’s all very well thinking about getting a better rate in two years, but what if the economy takes a nose dive and, when the time to renew comes around rates have gone up?
We are about to find out. I’m well into the final year of not one but two fixed rate deals, one a buy-to-let and one on my home, so any kind of interest rate rise makes me jumpy, but right now I’m hoping for an economic miracle. The stark reality, revealed this week, is that fixed mortgage rates have hit a ten year high at an average of 6.75%. Even worse, some lenders are set to completely withdraw their fixed term products as funds start to run out.
That means anyone looking for their fixed term fix over the next few months will be faced with something of a Hobson’s choice. Rates will be higher and there will be less choice and, to make matters worse, we can’t even accuse the lenders of trying to make a quick buck – the rate at which they lend to each other on the money markets (the swap rate) reached 6.49% on Friday 13th and that’s when the latest round of rate rises started.
So what now? Personally I’m just going to sit and worry until January, when I can start to look for a new deal (my current ones run until April 09). But it’s likely that I’ll find myself in the same boat as anyone looking for a fixed rate deal now.
Funnily enough the situation now turns our fixed rate logic on its head. Do we grit our teeth and stick with fixed rate even though the rates will be a lot higher, or do we look for capped or even, shock horror, discounted variable rates? But what if we fix and then rates steadily go down? Then again, if we go for lower payments now with a discounted variable rate they could very well continue to rise…
But there’s not a lot of point moaning about it. We’ve had it relatively good for years, so we’ve all been saving like mad for just this eventuality right? No, me neither. We’ve all been busy taking part in an orgy of high street spending without a giving the future a second thought. Now we just have to be terribly grown up about paying for it all.
Personally, I’ll probably do what I always do. Start looking early and hope to find a good deal (remember, once you secure a mortgage offer it is valid for three months). I don’t know if it will be a two year fixed this time, but I do know I’ll be feeling a lot less smug this time round. More mug in fact.
Matthew Bretherton is a freelance writer living in the Cotswolds. He is married with two kids, two mortgages and more grey hair than seems fair at such a tender age.
