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If you are one of the many mortgage holders on a ‘low’ variable rate mortgage, should you now consider the option of transferring to a ‘fixed’ rate?
Many make (and some keep to) New Year resolutions that often involve a financial audit. With mortgage payments the largest financial commitment for most people, a review of your mortgage should certainly be close to the top of any New Year ‘to do’ list.
Don't forget the whole picture
There are, however, several factors to consider before making the change. Assuming you’re a mortgage holder, you’ll undoubtedly be aware of the costs associated with your mortgage but do you know what additional costs you had to pay to get your mortgage?
In looking for the ‘best rate’, it’s important you don’t overlook the legal and arrangement fees when changing your mortgage.
Where are interest rates going?
The current base rate of 0.5% is historically low and has been since March 2009. Many have benefited from low repayment with some enjoying standard variable rates of 2.5% and others with lifetime tracker rates just above the base rate.
Most experts agree though that interest rates will increase. When it comes to the serious detail of How Much? and When?, there is less consensus.
A poll of economists by Reuters in December estimated that the first rise in base rate would be in the Autumn of 2011 with an increase of interest rates up to 0.75%.
The same poll a month earlier estimated rates would rise to 1% by the end of 2011. In April 2010, the prediction was for 2% by the end of 2011. And, indeed, some economists don’t expect an increase until 2012!
What they do all agree on though is that, in the short term, it is unlikely that rates will return to the high of 5.75% of July 2007.
So what should you do?
First, audit your current arrangements and think about your attitude to risk. If you like ‘certainty’ in all things, then a fixed rate could be for you.
If you currently benefit from a low variable rate, ‘Stress Test’ your current deal. Calculate what your monthly payment would be if there was a 2%-3% increase in base rates and then compare this to the current ‘best’ fixed rate ‘offers’.
Don’t forget to include the ‘costs of change’ (see above) and remember, the rate offered will be dependent on the mortgage loan to value.
Bear in mind too that the recently announced ‘higher than expected’ inflation figures shows how even the experts get things wrong and that this may bring forward any possible rate increase.
So, ensure reviewing all aspects of your finances is on your New Year to do list and make sure you keep to any New Year resolution you made ‘to improve your financial health in 2011.’
Happy New Year and remember, we are here to help!
Article by Tim Haddon
Financial Planning Consultant at Legal & Medical Investments Ltd
January 2011 |
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