With interest rates at a historic low, many of us will be enjoying lower mortgage payments. But what goes down must go up again, so is now the time to snap up a fixed rate bargain?
Why are mortgage rates low?
In essence mortgage rates are so low at the moment because the Bank of England base rate - a measure used in lenders' rate setting decisions - has remained at an all time low of 0.5% for a number of months.
Despite this, it’s important to remember that not all mortgage deals are currently offering low interest rates. For instance, anyone who signed up to a fixed rate deal prior to the Bank of England base rate fell may well be kicking themselves, since mortgage rates before that time were significantly higher than they are now – and fixed rate products are not affected by changes in the base rate of interest.
However, homeowners on a tracker deal or those who have allowed their mortgage to default to their lender’s standard variable rate are likely to have benefited from low interest rates and, in turn, lower monthly repayments.
What is a fixed rate mortgage product?
A fixed rate mortgage charges a set rate of interest on the loan for an agreed period of time – typically between two and seven years, though much longer term agreements may be available from some lenders. After that time, the rate of interest applied will usually revert back to the lender’s standard variable rate (SVR).
The advantages of a fixed rate mortgage, and the reason that around 70% of mortgage customers opt for a fixed rate deal, are two-fold. First of all, monthly payments will be consistent and predictable each month and secondly they will be protected from any fluctuations in the Bank of England rate.
Of course, the risk of taking up a fixed rate deal is that, should interest rates go down, you will miss out on the chance to cut your monthly payments.
I am currently on a variable or tracker mortgage, should I fix?
It is very hard to be certain what will happen with interest rates, and therefore fixed rate mortgage products. However, given that the Bank of England base rate is already at a low of 0.5% and has remained at that level for some months now, it is very hard to imagine it will fall any lower. Indeed, most experts agree that the next move will be upwards, though when that might happen is open to debate.
What is likely, however, is that the mortgage lenders will start to increase rates some time this year, in anticipation of the Bank of England making its move. In fact a number of 'big players' have already started to inch up their fixed rate offerings (although this is thought to be in response to high swap rates on the wholesale market - the rates that lenders use to fund a large proportion of their fixed rate offerings) which may mean that the rest of the market will soon follow suit.
Given that fixed rate products offering interest rates of less than 3% are currently available, now may well be the time to fix - waiting too long might mean you end up paying more interest.
My mortgage deal is already fixed; can I opt for a better deal?
While the short answer is ‘yes you can’, it's important to be aware of the costs that are likely to be involved in switching when you are already tied into a mortgage deal – rather than simply looking at the interest rate on the product.
For instance, it is likely that you will have to pay a ‘redemption penalty’ to get out of any existing mortgage deal you are currently tied into. Check your mortgage terms and conditions, but this is usually a fixed percentage of the overall mortgage debt and so can represent a significant cost. On top of this it's more than likely that you will need to pay out for application, valuation and other fees in order to secure the new deal. This can mean that any savings you make from a lower interest rate may well be more than balanced out by those costs.
- Find out how much switching will costs you – including monthly payments, set up fees and any penalty for switching early.
- Compare this will the cost of your current mortgage over the same period
- Only switch if it makes sense financially over the long term – don’t be seduced by lower monthly payments alone
Are there any drawbacks to fixing?
If the Bank of England base rate remains very low and mortgage lenders follow suit, you could end up paying more each month than if you stayed on a tracker or standard variable rate deal. This is all about timing. If you wait for too long before fixing, you might miss out on the best deals, but if you fix too soon, you will pay more, since fixed rates are currently higher than standard variable rates. The evidence, however, does suggests that mortgage rates are likely to start to rise again soon.
How do I go about fixing my mortgage?
There are basically two options. You can either stay with your current lender, simply selecting a fixed rate product that suits you from the range available, or you can shop around, looking at the whole market to find the best available deal.
Again there is a balancing act to carry out here. That is, whilst your current lender may not offer the best headline interest rate, there will almost certainly be additional costs involved in switching to a new lender – for instance surveyor and solicitor fees. The best thing is to research both.
First of all, call your current lender to find out what fixed deals are available to you and ask for an illustration based on your specific circumstances. This should provide you with all the information you need – including monthly payments and any costs involved in securing the deal.
At the same time, research the market to see if anything better is available. It can be a good idea to enlist the help of an independent whole of market broker to advise you if you're not sure where to start.
If you find a deal that you think is better, you should again request an illustration detailing likely monthly payments and a breakdown of all other costs. This information will help you to decide which approach makes the most financial sense – i.e. the deal that costs the least over the life of the products (be it two, three or more years) is probably the one for you.
- Get an illustration from your current lender, based on your preferred fixed rate product
- Get an illustration from another lender, having researched the market to find the best deal
- Make sure that both illustrations include all costs associated with the mortgage, not just monthly payments
- Compare costs over the life of the mortgage products, to work out which is cheapest overall
How long should I fix for?
You will probably find have the choice of short or longer term deals, but which is right for you will depend on your financial circumstances and attitude to risk.
The benefit of going with a longer fixed-term deal is having the reassurance of a rate that you are happy with for a number of years, and being protected from interest rises during that time. In addition, going with a longer term fixed deal will protect you from the hassle and expense of shopping around for another deal in a couple of years.
On the other hand short term deals are can be a good idea if you want to switch from rate to rate, as you’ll have the reassurance of knowing you can move to another deal in a couple of years if your rate becomes uncompetitive.
This really is about personal choice, though you will find that longer term deals tend to charge slightly higher interest.
Is there an alternative to fixing?
Yes, you may want to opt for a tracker mortgage. These are designed to allow interest rates to rise and fall according to a measure determined by the lender, usually tracking a couple of points above the Bank of England base rate or the lender’s standard variable rate. This ensures that your rate will go down if interest rates fall (or stay low for now), but also presents the risk that your repayments will increase substantially as and when the interest rate rises.
A capped mortgage deal may also be worth looking into. You will still pay a variable interest rate but this will usually have a ‘ceiling’ meaning that your interest rate will not be able to go over a certain amount. A capped mortgage tends to be slightly more expensive than a tracker, as you get the flexibility of a tracker but with added protection.
In addition, you could consider an offset or current account mortgage, which allows you to use the balance of your current account (current account mortgage) or current account and savings (offset mortgage) to reduce your overall mortgage debt and therefore bring down your monthly payments.
Again, however, remember that there are likely to be costs involved in securing a new mortgage deal whichever option you go for so it is important to get an illustration based on your circumstances, and detailing all fees, before making a decision.
