Remortgaging in 2017 – is now the right time to fix & for how long?
Why fix your mortgage rate?
At the heart of the ‘should you fix your mortgage’ question is a worry that interest rates will soon be heading upwards. The attraction of fixing your mortgage rate is the certainty it brings to your mortgage monthly repayments. The interest rate on a fixed rate mortgage is fixed for a specific period of time and will remain at this rate regardless of changes to the interest rate in the market place. Once the fixed period expires then the rate will normally convert to the lender's Standard Variable Rate, or another fixed rate if available. Lenders frequently charge a fee (Early Repayment Charge) if a borrower wishes to terminate or switch to another interest rate within the fixed term.
People who are currently paying their lender’s standard variable rate (SVR) are vulnerable to interest rate rises. If interest rates go up then so will their monthly mortgage payments. Tracker and variable rate mortgages have interest rates which reference the Bank of England base rate, currently at the historic low of 0.5%. However, while tracker mortgages will move in step with the base rate (e.g. 1% above) lenders can often move their standard variable rates with no defined link to the base rate. In fact a number of them have already done so, including the Bank of Ireland.
So if you are on the lender’s default SVR, which around 70% of mortgage borrowers now are, then check the terms and conditions. Some lenders have SVR’s which will always be at a maximum of say 2% above the bank base rate (most Nationwide mortgages taken out before April 2009 fall into this category).
SVRs have traditionally been the most expensive way to borrow but a combination of a low base rate and the small print in the mortgage terms and conditions mean that many borrowers are happy sticking with their SVR for the time being. It’s a case of the small print actually benefiting the customer for once as some of the SVRs (namely those with a base rate plus 2% max limit) compare to the best tracker rates out there.
Are interest rates likely to rise?
Whatever deal you have one thing is certain when it comes to interest rates, the next likely move is going to be an interest rate rise. In fact the Bank of England almost raised interest rates this month for the first time in a decade. People are getting too comfortable with the notion that 0.25% is the norm when it comes to the Bank of England base rate. It is not. Historically the norm has been somewhere around the 5% mark so the Bank of England will move rates back up in the future. For the latest view on when interest rates might rise read the latest interest rate predictions. The article is continually updated and reveals when the market predicts interest rates will start to rise.
Is now the best time to fix your mortgage?
In theory there has never been a better time to fix your mortgage rate. The consensus among mortgage advisers that I speak to say that 'mortgage rates have never so attractive and now is the best time to remortgage and fix your rate'. However, they also add that while they have been surprised at how competitive (in terms of low mortgage rates) the mortgage market has remained this will change when consumers get wind of a potential rate rise by the Bank of England (BOE) and they all rush at once to fix their mortgages. The trouble is that mortgage lenders will have a limited availability on each mortgage deal. When they hit their target they will no longer accept any new borrowers. This has a knock-on effect to other lenders and the rates on even the cheapest fixed rate mortgage will rise. So when consumers inevitably all rush to fix their mortgages before it's too late then all the best deals will quickly evaporate. We could be about to experience this stampede as the Bank of England shocked the market by revealing that it almost raised interest rates this month. So if you are contemplating fixing your mortgage rate to avoid your monthly repayments rising in the event of a BOE base rate rise then it's prudent to take action now rather than later.
Should I fix my mortgage for 2, 3, 5 or 10 years?
If you have a low loan to value (the size of your mortgage as a percentage of your property value) then you will almost certainly benefit from fixing, as you will be able to secure a low fixed interest rate. The best 2 year fixed deals are around 1.25 (with a 65% LTV). The best 5 year fixed deals are around 1.83% (with a 65% LTV). But do look beyond the headline rate and focus on the total cost of the deal including all fees. The longer your fixed term the longer you are locked into a lower interest rate. The trouble is that if you opt for a long fixed term period you may have exit penalties and early redemption fees if you want to repay your mortgage or move. In addition, if the BOE base rate is cut (albeit that is unlikely) you won't benefit either. These factors have to be traded off against the cost of exiting your current deal and the certainty that a fixed term mortgage provides.
If your SVR is low (say around 2.25%) and you have little or no equity in your property you may be better off sticking with your existing deal for the time being. (In some cases you won’t have a choice if your LTV is too low or you are in negative equity). Yet for most people the tide has turned and we are now at the point where it is a good time to remortgage and/or fix their mortgage rate.
Should I get a variable or fixed rate mortgage?
While I've highlighted the pros and cons of fixing your mortgage the alternative is to deliberately choose a variable rate mortgage. With a fixed rate mortgage your interest rate is fixed for say 2 years and when your fixed rate period ends you move go onto the lender's higher standard variable rate (SVR). If you took out a variable rate mortgage, rather than a fixed rate mortgage, then the interest rate would typically rise and full at the whim of the lender throughout the lifetime of the mortgage. However, you will likely benefit from a lower mortgage rate.
How to find the best fixed rate mortgage
Most consumers will wrongly assume that using a price comparison site is the best thing to do when looking to remortgage. However, bear in mind
- many mortgage deals are only available via mortgage advisers so don't appear on price comparison sites
- not everyone can get the rates quoted on price comparison sites
- price comparison sites don't take into account your credit rating or personal circumstances which will determine whether a lender will actually lend to you. For example you may not be eligible for the deals quoted by comparison sites and won't find out until they credit check you. That in itself will then hinder future mortgage applications
- there are may be options open to you other than fixing your mortgage such as a capped mortgage.
That is why you are almost always better off dealing with an independent mortgage adviser rather than going it alone. Which is why most borrowers now use a mortgage adviser to find the best deal from a lender who will actually lend to them.
I therefore recommend that you arrange a free mortgage review by a FCA regulated mortgage adviser. Simply click on the link and answer the four multiple choice questions about your situation and the highest rated mortgage adviser near you will get in touch and inform you if it is possible for you to remortgage and how much you can save. Typically readers save around £80 a month for every £100,000 of their mortgage when they reduce their mortgage rate by just 1%.
How to research the best mortgage deals yourself
Alternatively if you do want to go it alone the first thing you need to work out is what fixed rate you will get. This will depend on, among other things, the amount you want to borrow compared to the value of your property (called the Loan to Value), your credit rating, the fixed rate period, your earnings….
With regard to the term you might take, once again it depends on your view of interest rates and the level of certainty you want when it come to your monthly payments. But what I would say is that a lot of mortgage advisers are suggesting that people consider longer term fixed rates rather than a simple 2 year fixed deal. This is because while the market expects the base rate to rise it doesn’t expect it to rise quickly. Consequently if you take out a short fixed term mortgage then just as it comes to an end you might find interest rates have just soared at a time when you are once again subject to a lender’s SVR (standard variable rate), but probably without an upper limit to any increases (most lenders have scrapped these on new mortgages). A decent mortgage broker should be able to advise you on this.
Once you’ve decided on the period for which you want to fix then find out the rate at which lenders may lend to you. Moneyfacts offer tables of the best mortgage rates For example, here are the best mortgage rates for 2 year, 3 year, 5 year and 10 year fixed mortgages. But as I mentioned above such comparison tables don't show every mortgage deal available in the market. When using comparison tools bear in mind that the best rates are usually reserved for people with the lowest loan to values (LTV).
It goes without saying that when you take out a fixed rate mortgage you could end up paying say 5% for 5 years and interest rates remain low throughout. If this becomes the case then you can only switch mortgage deals if you pay an early redemption charge. Obviously interest rates might soar to 7% so you would be quids in on your fixed rate deal.
One trick to keep your mortgage options open
However, if you want to fix your mortgage rate but are unsure whether to do it now or later, you could hedge your bets by getting a mortgage offer in place now and not complete for say 6 months. That way you have a good fixed rate deal ready to go and can still take advantage of your current low flexible rate for a few more months. Obviously you must bear in mind that you will likely incur non-refundable valuation charges, whether or not you actually decide to complete in the end, and the lender could technically withdraw their offer before you accept. But these are risks that you would face even if you fixed now.