This world of low interest rates is a blessing for anybody with a mortgage. Indeed, many doctors and dentists with youth on their side haven’t known any different. Are things about to change and force difficult decisions to be made?
Low mortgage rates have arguably had a good long run. The Bank of England base rate fell from 0.50% to 0.25% in August 2016, a record low and the first cut since March 2009.
Since then the Monetary Policy Committee (MPC) has consistently voted against raising interest rates, but there are now loud whispers that a rate rise is potentially imminent. In the “relatively near term” in the words of Bank of England Governor Mark Carney.
What will trigger an interest rate rise?
In August this year, the Bank of England outlined its market predictions that rates will rise to 0.5% in the middle of 2018¹. Now it may even be as early as the 2nd November when the MPC next meet.
But haven’t we been here before?! Over the last 5 years there have been suggestions that interest rates will rise, yet in reality they have reduced to unprecedented lows.
On the other hand, inflation is running at 2.9%² (almost 1% above the BoE’s 2% target), UK wages are growing better than expected, and the outcome of the Brexit negotiations is still unknown.
Is now the time to fix your mortgage rate?
With inflation, wage growth and so much uncertainty ahead, there is certainly a strong argument for fixing your mortgage rate now, and there are many great rates to be had.
Mortgage lenders’ fixed and tracker rates look more attractive than ever. For those with good equity in their home, long-term fixed rates can be below 2%.
A fixed rate is certainly great if you like the security of knowing that your mortgage payments remain the same for a set period. But allow me to play devil’s advocate a little…
Should you be going for a variable / tracker mortgage?
Would you still go for a fixed mortgage rate if there was a variable / tracker mortgage that had a competitive rate and a switch-to-fix facility without penalty?
The switch-to-fix facility would mean that, if rates did rise, the lender would allow you to move onto one of their fixed rates without having to make a new application or pay an early repayment charge on your existing mortgage.
With such a mortgage you would benefit from the current low tracking rates, but have the option to switch to the safety that a fixed rate may offer if interest rates were to rise.
The downside is that the lender may not offer you the best fixed rate in the market at that time.
What about a combined fixed and variable / tracker mortgage?
Alternatively, you could place say 75% of your mortgage on a fixed rate – offering the security of known payments – and the remaining 25% on a variable / tracker rate. Not all lenders offer this facility but plenty do. Why not have your cake and eat it!
No rose is without its thorns so to speak. What if rates increase quickly or your mortgage lender changes their terms and conditions and you can no longer switch to a fixed rate without penalty? Even if a rate rise announcement moves things up by only 0.25%, lenders may take a more longer term view and increase their fixed rates on the basis that rates will continue to steadily rise.
What should you do?
Without a crystal ball, it’s impossible for anyone to say in absolute terms when interest rates will rise. It is, however, relatively safe to say that they are likely to rise soon.
Although it’s tempting to make financial decisions based solely on cost, there are pros and cons to fixed, variable / tracker, and combined mortgages.
Whether in fact you should be changing your mortgage at all and, if so, what type of mortgage you should opt for, is a decision you should make once you have discussed all your options with your adviser and considered your own current and future personal circumstances.
And remember, your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Which mortgage option would be your preference? Let us know by adding a comment below.