Wider economic uncertainty is continuing to affect the housing market, with house price growth slowing and some potential buyers and sellers choosing to wait. If you’re a homeowner and not considering moving, you may be wondering what impact the uncertainty will have on you.
One of the areas it may affect is interest rates. Following the financial crisis, the Bank of England lowered its base interest rate to historic lows. This, in turn, has meant lower interest rates on mortgages for almost ten years. In August 2018, the bank increased the rate from 0.5% to 0.75%, the highest level since March 2009. At the time, Mark Carney, Bank of England Governor, suggested that more rises would be on the way, but it would be ‘gradual’.
Despite the two recent rises, the interest rate is still considered low. But with further increases likely on the horizon, your mortgage payments could increase if you have a tracker or variable mortgage or once your current fixed deal comes to an end. With this in mind, should you consider fixing the level of interest paid?
When the time comes to search for a new mortgage product you have three main types to choose from:
Fixed rate: With a fixed rate mortgage the level of interest that you pay will be fixed for a defined period of time, often two, three, five or ten years. Rising interest rates won’t affect the amount you need to pay until you come to the end of the term, when you can search for a new deal.
Tracker: A tracker mortgage will follow the Bank of England base rate. It will usually be the base rate plus a defined amount, such as 2%. As a result, the amount you pay each month will be directly influenced by the central bank and wider economic factors.
Variable: A variable mortgage is similar to a tracker mortgage. However, instead of following the Bank of England rate it will follow the one set by your lender. This can rise and fall, affecting your mortgage payments.
In the current climate, there are two key reasons to consider switching to a fixed mortgage now.
Safeguard against future interest rate rises
Choosing a fixed rate mortgage allows you to set the level of interest you’ll pay. Even if interest rates increase over the term, you won’t be affected. If you’re worried about how interest rises will affect you or believe that they will rise, fixing yours can give you peace of mind.
Fixing the interest rate paid on a mortgage makes sense when their rates are low. At the moment there are many competitive deals on the market for first-time buyers, movers, and remortgaging alike. While the rates on a fixed mortgage will typically be higher than tracker or variable counterparts initially, over the medium and long term, they can prove the most cost-effective option if interest rates rise.
Certainty of payments
A fixed rate mortgage can give you certainty and peace of mind. You will know exactly what your mortgage repayment will be each month and don’t have to worry about it unexpectedly increasing. It can help give you the security to plan effectively, without having to leave a buffer for rising interest rates.
If you prefer to know what will be coming out of your bank well in advance, a fixed mortgage may be the best option for you.
While these benefits can be attractive, it’s important to keep in mind that there are drawbacks too. Despite indications suggesting that interest rates will rise, there is no guarantee. Economic uncertainty could prompt the Bank of England to hold its base rate at the current 0.75%, or even cut it again. If this were the case, those on tracker or variable mortgages will benefit, but homeowners with a fixed mortgage would not.
Of course, a fixed mortgage isn’t the best option for everyone. For some, a tracker or variable option is more attractive thanks to the flexibility they offer, and, in some cases, it can mean repaying less over the length of your mortgage term. If you’re searching for a new mortgage product, please contact us. We’ll help you understand which mortgage type is best for you and provide support and advice throughout the application process.