I'm often asked by clients 'Should I fix my mortgage?' or 'How should I fix my mortgage for?' Even as a qualified mortgage adviser, the answer is that if I knew, I'd have retired many years ago! The adviser's role is not that of clairvoyant with crystal ball, more one of a mentor enhancing your strengths but compensating for any potential weaknesses.
It's important not to view the mortgage securing the roof over your head like an investment in my view and you should not try to 'play the market' when choosing your next or first mortgage product. As interest rates have been at all time low levels since 2009 it doesn't take a professional to predict interest rates will rise, so fixing your mortgage rate seems the obvious choice for most.
Nobody knows exactly when interest rates will next rise and by how much (even the policymakers in the Bank Of England) but there are a few signs to look out and things to consider:
- The first Thursday of each month the Bank of England Monetary Policy Committee (MPC) meets to determine fiscal policy for that month, usually interest rates are a fulcrum of this. There are currently nine members on the committee and an announcement on rates is normally made that day or the next, but keep an eye out tucked behind the headlines 1-2 weeks later when the minutes of the meeting are made public. This will tell you how the nine voted and recently two of them voted to increase the 'base' interest rate....so we are getting closer to a rise.
- Next May a general election in the UK is scheduled, if you look back historically you will see that it is rare for interest rates to rise in the year prior to a general election, bear in mind though that prior to 1997 interest rates were directly controlled by the chancellor of the exchequer so politics played a big part.
- The MPC want to control spending and keep the economy pulling out of recession (throughout which retail was particularly hard hit) and Christmas is a key time for retail businesses, so is it likely they'll vote to increase rates and make us all tighten our belts just before Christmas?...as they say, you do the maths.
- Moving away from The Bank of England, the housing market is traditionally seasonal and each bank and building society has lending targets set each year. They all want to attract borrowers in the spring months so tend to offer the best mortgage rates they can from February to July, but there is also a 'spike' in the market between the start of September through till the clocks go back in mid October as the 'must sells' try to set up a move before Christmas. Any lenders who haven't hit targets by this time may cut their mortgage rates regardless of what the MPC is doing.
- Fixed Rate mortgages are not directly linked to the base rate but are chunks or 'Tranches' of money bought by the lenders from the money markets based on what's known as 'libor' or 'swap' rates, so keep an eye on these. However a base rate change clearly affects them as a rise makes them popular and a drop (not likely now) makes them less so. Remember each individual best fixed rate mortgage is like a pizza, once every piece is sold, then it is over, and the lenders have to go back to the markets and buy another tranche, hence they can be withdrawn within hours notice and replaced with a higher rate the next day.
So that's a few tips on when to fix your mortgage, but....
How long to fix your mortgage for?
Two year fixed rate mortgage or under
Based on current market conditions this will get you a very low rate but consider what might happen afterwards. If you can easily afford a rate of 2% above this, plan the property as a stop gap or need flexibility to pay off a lump sum or similar then a two year fix might be for you, although an offset mortgage might be better for the latter group. Don't forget though that most products have a set up fee (typically £500- £1000) and you need to put this into your calculations when looking at a longer term rate as you'll likely pay more fees if you switch every two years.
Three Year fixed rate mortgage
Popular in the last few months as the difference between swap rates (see earlier) on two and five years has increased, but the three year fixed mortgage rates have remained close to the two year giving a little more security for a modest initial increase in monthly repayments. Some predictions are that rates could peak (in this decade) in 2017 though so maybe jumping into the fire?
Four Years, Five years and beyond
Don't take one of these to play the market, you'll be looking over your shoulder at rates for the term while you are 'paying more'. Take it for peace of mind to stop the worry, you'll likely pay less in fees than shorter term rates but be careful you don't tie in for too long if you need to move, most products are portable to another property but you'll be stuck with the same lender who might not be competitive when you need to move if you need to borrow more.
Of course the best thing to do is allow a good adviser to do all of this and much more!
The above article was produced by Dean Mason - Cemap, Cert PFS. Practice Principal at Masons Financial Planning