The credit crisis ten years ago had one silver lining. The low interest rates introduced to help keep the economy turning over meant very low mortgage repayments.
Whether these low rates contributed to house price inflation is a moot point – but one thing that is for certain is they are going back up. With the Bank of England raising base rate to 0.75%, many people are looking at fixing their mortgage rates to enjoy the low rates for as long as possible.
Should you be doing the same?
Will mortgage interest rates go up?
Even in a low interest world, there are pressures on mortgage providers. The Bank of England Term Funding Scheme has been providing banks and building societies with funding which supported low mortgage rates. It is coming to an end, and as the economy gets closer to normality, more expensive mortgages look inevitable.
Tracker mortgages with a set percentage above the prevailing base rate go up automatically – the others will follow. So, the simple way to keep mortgage costs in control may be to fix them before rates go up again.
What is a fixed rate mortgage?
A fixed rate can mean no increases for 2, 3, 5 or even 10 years. The lender is certain of your business for the time agreed, so it can afford to offer a special rate. Whatever happens to interest rates, your repayments are fixed for the fixed (or incentive) period that you opt for. There are downsides, of course. If you want to get out early, you’ll pay high penalties, and rates are usually higher than with variable mortgages. But if you have a home you want to stay in, fixing might be prudent.
What should you look for?
The first thing to decide may be how long to fix. The longer the fix, the higher the rate as the lender has more risk of interest rates changing.
So a five-year fixed will have a higher rate than a two-year fixed, but does provide you with a longer period of certainty.
What about a 10 year fix?
Longer term fixed mortgages secure the maximum protection from rising interest rates, and 10-year fixes are now becoming popular. According to financial information provider Moneyfacts, the number of 10-year fixed rate mortgage deals is growing. Lenders are competing for borrowers, and in contrast to the rest of the mortgage market, where rates are rising, this is driving down costs. The average mortgage rates on 10-year deals have fallen from 3.52% in July 2016 to 3.1% as of August 2018.
But there could be a catch
Being tied into a deal for more than a third of the term of an average mortgage could mean saving money, but the higher the loan-to-value (LTV) you have, the less beneficial a 10-year fixed rate deal will be. During those 10 years you would reduce your debt, but you would not be able to get the cheaper deals that going down the LTV bands might offer.
There is also the problem of Early Repayment Charges, which can be substantial with 10 year fixed deals.
If you want to look at the most suitable deal for your mortgage, you need an expert on your side. A call to Continuum could offer just that.
Your home may be repossessed if you do not keep up repayments on your mortgage
moneyfacts.co.uk – Time to commit to a 10-year mortgage? – 2nd August 2018