Mortgage Guides

Is now a good time to get a fixed-rate mortgage?

By Seamour Rathore seamour@consumerchoices.co.uk

Many people on tracker, discounted and some standard variable rate mortgage deals are benefiting from historically low interest rates. So why are professionals suggesting they switch to a fixed-rate deal? (Updated 15/2/10)

Interest rates are at their lowest level for 300 years. That’s good news for anyone on a tracker deal (40% of those with a mortgage*), who will be paying less.

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In such a low interest rate environment, it may seem unnecessary to consider taking on a fixed-rate mortgage. Experts, however, are suggesting that economic uncertainties have opened up a window which makes fixed-rate deals look attractive.

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Why are fixed rate mortgages attractive now?

Interest rates: Many forecasts for this year suggest that interest rates will start to move up gently towards the end of the year. However, it is not at all clear where they might go after that.

History shows that during a recession interest rates can peak – in the last recession in the early 1990s, interest rates hit 15%. If the UK steps up issuing debt in the form of Gilts, and international investors start demanding higher rates of return for what they perceive to be a riskier investment, then interest rates could start to rise.

There is also a risk that the Bank of England will misjudge Britain’s inflation rate again, and will keep interest rates too low for too long. It may then have to raise them sharply to put the brakes on rising inflation.

House prices: In recent months house prices have undergone something of a revival. Britain's biggest building society, Nationwide, has said that by the end of February 2010, annual house price inflation will be running at 10%. Most commentators do not expect such large increases to be sustained, however.

To some extent, price increases have been fuelled by a shortage of supply of properties on the market. The biggest limiting factor, though, is the availability of mortgage finance. Lenders have become much stricter about the circumstances in which they will lend for a mortgage, and the level of equity or deposit needed to qualify for the best deals.

If you are worried about rising rates during the course of this year, or falling house prices, now is be a good time to consider your options.

At the first sign that interest rates are going to move up, lenders will start to increase the cost of fixed-rate products as they will be the most popular choice in a rising market.

Taking a longer term fixed-rate, for example five years or more, might prove better than taking a two-year fixed-rate as that the latter would mean having to review your mortgage deal again when rates may still be rising, and almost certainly won’t have fallen back again.

Who might benefit from a fixed-rate deal now?

You may benefit from a fixed-rate mortgage deal if you are in one of the following situations:

Coming to the end of special deal on either a discount, tracker, or fixed-rate and moving on to your lender’s standard variable rate (SVR) which is being kept at high rate
On your lender’s SVR and want certainty over what your repayments may be in the future
On an uncompetitive fixed-rate deal (taken out when interest rates were much higher than today) and feel that it would be worthwhile to pay an exit fee to be able to remortgage onto a lower-cost fixed-rate deal while interest rates are so low
Feel that interest rates may rise in the medium-term and you want to take advantage of the medium-term deals available thanks to our current low interest rates.

Should I switch if I’m on a tracker?

If you are on an attractive tracker with a skinny interest rate over the base rate, you will have to make a “psychological leap” if you are prepared to swap this for a more expensive long-term fixed-rate deal now.

For example, someone on a lifetime tracker paying 1% over the Bank of England base rate is currently paying 1.5% interest on their mortgage, given that today’s base rate is 0.5%.

They might decide that, taking a long-term view, they could cope with a spike in interest rates and would be better off over the long haul. That’s because it is unlikely that trackers with such a slight margin over the base rate will be available in the market for many years to come.

Fixed-rate mortgage recommendations

It’s a good idea to sit down and think about where interest rates may go, how affordable that would make your mortgage, and assess how much equity you have in your home.

Do you want the certainty of knowing what your monthly mortgage payments will be, even if you are paying more than you might be on your current variable rate deal?

You should also speak to in independent financial adviser about your circumstances and what the best deal for you may be. In a situation like this with so many extraordinary variables, every household will need a different solution.

(*Council of Mortgage Lenders)