Mortgages are a hot topic at the moment. Sadly, it's for all the wrong reasons - but that doesn't mean homeowners and homebuyers have any less agency. Whether you're new to the property ladder, or on your second rung, the duration of your mortgage deal can have huge implications for your finances. Let's take a look at the big question on many homeowner's minds: should I fix my mortgage?
Fixing your mortgage for a specific amount of time comes with its own benefits and challenges. On the one hand, it can offer stability and peace of mind, as it guarantees a set interest rate for a set period, protecting you from potential rate increases. If you prefer predictable monthly payments and want to plan your budget accordingly, this could be a positive.
But if you want to switch or pay off your mortgage early, fixed-rate mortgages often come with early repayment charges or exit fees. Also, you won't be able to take advantage of positive market conditions and interest rate changes.
Carefully assess your situation, and weigh up the pros and cons before making a decision.
The length of time you lock in (or fix) your adjustable-rate mortgage should be contingent on several factors. Let's break them down.
Your future should play a big role in deciding your mortgage deal. These include your age, career plans, and familial situation. Consider how long you plan to stay in the property, and whether you anticipate any major changes in the near future. Your ideal mortgage term should align with your specific situation.
You need to ask yourself some honest questions about your finances. If you prefer stability and want predictable mortgage payments over an extended period, a longer-term, fixed-rate deal might be suitable. If you anticipate changes in your circumstances, such as job changes or relocation, a shorter-term, fixed-rate mortgage could provide more flexibility.
Alongside this, you need to work out how much you can actually afford to pay. Long-term, fixed-rate mortgages generally offer lower monthly payments, while short-term, fixed-rate mortgages have higher payments, but you'll pay off your mortgage faster.
If you're new to home ownership and don't know where to start, work out how much you've historically paid in rent, and see if prospective fixed monthly repayments can match it.
Stay informed about the current state of the housing market and mortgage industry. External factors such as economic conditions, housing market trends, and government policies can impact interest rates and mortgage availability. Keep abreast of these factors and their potential influence on your decision.
How are interest rates looking at the moment? If they're low, or are expected to rise in the near future, you may want to consider a long-term mortgage to lock in a good rate for a longer period of time.
You'll only get a real sense of how you're feeling if you have a browse of available mortgage deals. Use sites like Comparethemarket and MoneySuperMarket to see the best deals in your local area.
There are lots of other packages available too, depending on your financial situation. You may decide against a fixed-rate altogether and go for a tracker, which follows a base rate like the Bank of England's. If the base rate falls, interest rates fall. If the base rate increases, interest rates rise.
Evaluate your tolerance of risk. Long-term fixed-rate mortgages provide more stability and protection against potential interest rate increases, while short-term fixed-rate mortgages offer flexibility and the opportunity to benefit from the potentially lower rates of the future. Assess your comfort level with rate fluctuations and choose a term that matches your appetite.
Review your current fixed rate deal!
Mortgage deals are contractual obligations, which means there are penalties for signing with another deal too early. Beware of any early repayment charges on your contract. If you plan to make significant overpayments or repay the mortgage early, a shorter-term fixed-rate mortgage with lower early repayment charges may be more suitable.
There’s no one answer that fits all. For most people, a low interest rate locked in for a long period is, of course, the ideal situation. Monthly repayments won't be affected by changes in the market like a variable-rate mortgage. You also won’t need to switch to your lender's SVR for years to come. Your mortgage repayments are, in essence, protected. On the downside, if interest rates fall further, you won't be able to benefit from them as a borrower on a tracker would.
It's for you to decide - but any decision you make should at least be informed. Mortgage lenders offer fixed-term mortgage deals of variable length for a reason - some customers prefer long-term security, while others prefer a short-term fix so they can take advantage of future rates within a shorter period of time.
It's also worth considering your context i.e. the current economic climate. If rates are currently high, some short-term speculation might be worthwhile. How long will they be high for? Is it widely believed they'll get worse? It's a game of risk, and there's no right answer. The only thing you can do is arm yourself with the best evidence you have and make the leap.
There are alternatives to fixed-rate mortgages, but they are more risky.
Unlike other adjustable-rate mortgages, tracker mortgages don't have fixed-rates. Instead, they follow a base rate like the Bank of England's, going up and down with the fluctuations of the market. This can have clear benefits and downsides. If the BOE's base rate is low, you’ll benefit from low interest rates. If it goes up however, you will suffer from a higher rate of interest.
Variable-rate mortgages, such as a lender's Standard Variable Rate (SVR), are another option. Similar to a tracker, a variable-rate mortgage can go up or down, but the mortgage lender itself determines how much the interest rate increases. Unlike a tracker, this is as and when the lender wishes.
Predicting the future of mortgage rates is challenging, but current trends suggest that it’s unlikely.
As of June 2023, mortgage rates are experiencing an upward trend. The standard 2-year fixed rate stands at 6.44%, while the standard 5-year fixed rate is 5.79%. These figures mark a significant difference from the low of 1.95% recorded in January 2022.
The rise in mortgage rates is closely tied to the Bank of England's (BOE) base rate, which has been historically low over the past decade. However, since September 2022, the base rate has been increasing to address the issue of inflation.
As of June 2023, inflation sits at 8.7%. The BOE's intention to curb inflation through consecutive rate hikes hasn't yielded the desired results, unlike similar measures taken in other European countries. Several factors contribute to stubborn inflation in the UK.
Supply chain disruptions resulting from events like Brexit and the Ukraine War have played a role. Rising energy and commodity prices have increased production costs for businesses, leading to higher expenses for consumers and subsequent inflation.
Following Liz Truss's October Mini-Budget, the financial markets reacted swiftly and aggressively, causing interest rates on government bonds to soar. The cost of borrowing affects mortgage rates directly, prompting the withdrawal of numerous products from the mortgage market.
Until inflation is effectively controlled, it’s unlikely that mortgage rates will return to lower levels in the near future.
No, not at the moment. Fixed-rate mortgages have taken quite the battering from the continuous hiking of the BOE's base rate. No one is in a particularly good spot, unless you managed to lock in a 5-year fixed deal before rates went up.
If you need to get a new deal, it’s worth exploring your options. Balance affordability with security, and know that the mortgage crisis can't last forever. In this situation, a 2-year fixed-rate, or even a short-term tracker could be useful.
Pssst... no one really knows! Global factors, supply conditions, and governmental policies change all the time, with mortgage rates following suit. No one can predict the timing of these variables. As such, we recommend taking expert predictions with a pinch of salt.
You have a lot of options - so many, it might feel bewildering. But hopefully, after reading this guide, you feel a little more comfortable navigating the world of mortgages.
Picking the right fixed-deal is important. It can have big implications for your future finances. But you can only do your best! Hindsight’s a wonderful thing, but no one can see the future. You can only make a decision based on the knowledge you have at your disposal within a single moment.
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