Should you fix your mortgage now?
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. (By the way, if you are thinking of remortgaging then download our FREE remortgage guide which is packed full of tips from mortgage experts on how to get the best mortgage deal, even if you have a poor credit rating).
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 a lot 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.
When will interest rates 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. People are getting too comfortable with the notion that 0.5% 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. And there has been a lot of recent press speculation that rates might be heading up sooner rather than later (which is probably why you are reading this). However, if you really want to get a feel for when interest rates might go up then read my latest interest rate predictions which tells you when the market thinks rates will start to rise.
Is now the best time to fix your mortgage?
In a word YES! There has NEVER been a better time to fix your mortgage rate. Every mortgage adviser I speak to says the same thing that 'mortgage rates have never been lower and now is the best time to remortgage and fix your rate'. In fact, it's not just low interest rates which mean that now is the time to consider fixing your mortgage, there is a new EU rule about to come in which may soon make it harder for you to remortgage. I explain this in the next section as well as what you need to do now to not fall foul of it.
In terms of the best fixed rate deals out there, these are likely to soon disappear. That's because the rate at which you can borrow money is actually linked to the City’s swap market rates, i.e. the rates at which banks will lend to each other for fixed terms . So the actual Bank of England base rate is not the deciding factor in the fixed rate deals out there. Yet these swap rates have started to rise which means that the interest rates available on the best fixed rate mortgage deals will also start to rise.
With banks no longer able to access cheap money via the Government's Funding for Lending Scheme there is the argument that rising swap rates will start to translate into higher mortgage rates. This is despite competition having heated up in the best 5 year fixed rate mortgage market.
To sum up, if you have a low loan to 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 1.54 (with a 65% LTV). The best 5 year fixed deals are around 2.14% (with a 65% LTV). But do look beyond the headline rate and focus on the total cost of the deal including all fees.
If your SVR is low (say around 2.5%) 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 your mortgage rate.
Hurry: The new EU rule that could soon stop you remortgaging
Yet it's not just about the interest rates on offer. The ability to remortgage and/or fix your mortgage will soon become more difficult thanks to a new EU rule due to come in later this year. Back in 2014 new rules were introduced which meant that lenders had to apply stricter affordability checks on new borrowers. They had to test whether borrowers could afford to continue to repay their mortgage if interest rates rise in the future. This meant that many people applying for a mortgage for the first time struggled to get a mortgage.
The good news for homeowners with an existing mortgage was that lenders didn't have to apply these stricter affordability tests to existing customers who wanted to remortgage without borrowing any more money.
However a new EU Mortgage Credit Directive will soon be imposed on lenders which will mean that they'll have to apply these affordability tests to everyone including existing customers looking to remortgage. The new rule is due to take effect from March 2016 but it can be backdated 6 months to Autumn this year!
If you are planning on fixing your mortgage rate when interest rates start going up the new EU rules may prevent you - leaving you stranded on your existing deal with your mortgage repayments rising in line with the bank base rate or your lender's whim.
If you considering remortgaging on your lenders standard variable rate I strongly suggest you follow the advice in the next section. It will a few seconds but could prevent your mortgage repayments crippling your finances in the near future.
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 book a FREE callback from this award winning mortgage broker* before you do anything else. There is no obligation on your part and I've personally vetted them. Simply click on the link, enter your name and number and they will take the hassle out of searching the market and make a recommendation, even if it is to stick with your current deal. Alternatively you can call them for FREE for an informal chat on 0800 073 2325. You have nothing to lose.
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, 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. The Money Advice Service has a great mortgage finder. But as I mentioned above such comparison tools 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.
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