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

Article updated: Thursday 14 April, 2011

By Seamour Rathore seamour@consumerchoices.co.uk

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If you’ve been sticking with your tracker or standard variable rate mortgage while interest rates are low, is it time to think about getting a fixed-rate?

For anyone on a variable rate mortgage such as a tracker or their lender's standard variable rate(SVR), low interest rates have been good news. But at the back of their minds many of these home owners are now wondering if it’s time to fix their mortgage. This would protect them from a rise in interest rates, pushing up the monthly cost of their mortgage.

The latest mixed messages about inflation - up one month and down the next - and the economy have left everyone confused as to whether the Bank of England will increase rates. So should home owners be looking to replace variable rates with fixed mortgage products?

And with differing views on what the immediate future holds even the experts can’t agree on where interest rates are going.

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Why are fixed rate mortgages attractive at the moment?

Many forecasts for 2011 have suggested interest rates will start to move up gently towards the end of the year. However, according to experts, this will probably be very gradual and not exceed more than 1%.

Fixed-rate mortgages offer people protection. They know how much they will pay each month for the next 3, 5, and 7 years if they fix, and will be protected against any future price rises.

So if you are worried about rising rates during the course of this year - or falling house prices - now could be a good time to consider your options.

The security and peace of mind offered by a fixed-rate mortgage will cost you more than the equivalent tracker mortgage, but that extra payment on the fixed-rate is the premium you pay for effectively insuring yourself against future rises in interest rates for the duration of your fixed-rate deal.

Also at the moment, fixed-rate products are flooding the market and although still on the right side of competitive, borrowers who have waited even just a few weeks before fixing may find lenders rates have increased their rates by almost half a percentage point, adding £35 a month to a £150,000 mortgage.

Also, fixed-rate mortgages come with a nasty financial sting in the tail as the average arrangement fee for a fixed rate mortgage is currently £1,054. But that may be a price well worth paying now because, as soon as there is the slightest inkling that the base rate will go up, lenders will hike their interest rates on fixed products because they will be the most popular choice in a rising market and lenders will be looking to cash-in.

Taking a longer term fixed-rate, for example five years or more, might prove better than taking a two-year fixed-rate, as 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 usually the highest rate charged by your lender on its mortgage range, which you want to avoid by signing up for another special deal
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 and good deals are still available
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 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%.

You might decide that, taking a long-term view, you could cope with an increase in interest rates and would be better off over the long haul. That’s because it is unlikely trackers with such a small 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.

Also, many people are simply unaware how much extra a month their mortgage payments will increase if rates go up. As an example, a £100,000 repayment mortgage at a rate of 5%, increasing by 0.25% would add £14.65 to the monthly payment or £175.89 a year. If rates go up by a full 1%, that would add £60.61 a month or £727.42 a year.

According to figures from the Council For Mortgage Lenders (CML), in January 2011, 52% of all borrowers that month took out a fixed-rate mortgage.

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?

Then, you should also speak to an 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 their own solution.

(*Council of Mortgage Lenders)

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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

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