Is a fixed rate mortgage suitable for me right now?
A fixed rate mortgage is the most common mortgage type in the UK at present. According to the financial conduct authority (FCA), around 74% of all mortgages are arranged with a fixed rate of interest. Half of these deals are due to come to an end within the next 2 years.
Therefore, some 3.2m households will come to the end of their current deal, and need to reassess their options before the middle of 2025. Many of these products would have started before the impact of the cost of living crisis. So it’s likely that the monthly mortgage repayments for those homeowners will be considerably higher than they were before. Obviously for people in that boat this is causing a lot of concern.
The biggest decision to make at that point will be whether or not to secure another fixed rate mortgage product. Before 2022 it was a relatively simple to find a competitive deal. Fixed rates were low, trackers would increase if the market were to rise, and the Bank Of England base rate sat at 0.10%. The next time around there will be many more factors to consider making the decision a lot more complicated.
What is a fixed rate mortgage?
A fixed rate mortgage is where the rate of interest on your home loan remains the same during the fixed period. Fixed rates can commonly be over initial periods of 2, 3 or 5 years. Although, recently there have been some longer term 7 or 10 year fixed rates on offer from a few lenders. Early repayment charges are payable should you wish to change to another lender or product during your fixed rate period.
During your chosen fixed period your monthly mortgage repayments will remain unchanged. No matter what happens to the mortgage market as a whole, your interest rate will not be affected. Once the fixed term ends, your mortgage rate will likely revert to a standard variable rate set by the lender. This happens if you do nothing. Standard variable rats will usually be more expensive and can increase / decrease at any time. However, you should no longer be tied in so you will receive a little flexibility in return.
When should I review my fixed rate mortgage?
The best course of action is to review the mortgage market 3-6 months before the end of the current deal. You will then be able to find a competitive new product with plenty of time to spare. It should then seamlessly switch over on the day following the end of any payable charges to the current lender.
When the general market trend is one of decreasing rates, you should also review whether or not it will be worth paying an early repayment penalty in order to swap a high fixed rate for a lower alternative. If you can lower your monthly repayments enough to save the cost of the early repayment charge over the remaining fixed term then it is worthwhile considering.
So should I choose a fixed rate?
Deciding between a fixed rate or variable rate alternatives ultimately boils down to personal preference and risk. First time buyers may not be aware of home ownership costs until after they have moved in. So fixing the monthly payments initially may be a good idea when budgeting. If you prefer your repayments stable or you have a cautious approach to mortgage risk consider a fixed rate option.
When interest rates are very low it makes sense to lock into a good fix for as long as you are comfortable. Keep an eye on the cost and early repayment charges though.
What about when market conditions are turbulent.
Things become a little trickier when the market is in a situation similar to the one currently. Rates have been steadily rising for the last 18 months. The last thing you want to do is fix your mortgage deal when rates are at a peak, unless they show sighs of stagnating at that level for a few years at least. So the worry is that if you lock into a deal now, the market could then drop away leaving you paying more than necessary.
Lenders price their product ranges to reflect that uncertainty. Longer term fixed rates may be cheaper on paper, but the tie in period is also longer. Shorter term fixed rates may be an option. You could still stabilise your monthly repayments, but re-assess your options in a couple of years and swap for something better. This would limit any exposure to high interest rates for the long term.
Alternatively you could consider a tracker mortgage and follow the rates downwards should that happen. You may be able to hop over to a fixed rate mid-term if a suitable option arrives. The trade off is that the safety net of fixed repayments is removed.
Summary
A fixed rate mortgage is popular for a reason, offering stability during times of uncertainty. Being fairly simple to understand, they can be easy factored in to budget calculations. However, the key to securing a good fixed rate product is timing. Choose a long term option when rates have bottomed out and it could be best mortgage deal you take over the whole term of the mortgage. Pick the wrong fixed rate at the peak and you could be burdened with expensive mortgage repayments as you watch interest rates tumble for others.
At the moment, lenders are luring people towards longer term fixed rate deals by offering attractive interest rates. There are a plethora of reasonable (on paper) 5 and 10 year fixed rate options available. This is in contrast to the shorter term 2 and 3 year fixed rates which have higher rates of interest and therefore larger monthly repayments. However, what will the rates be like in 2 years time?
If rates have hit a peak as many suggest, the rates on offer in 2 years could be the same or lower than they are at present. At this point there is a chance that they could out perform those longer term options that many tied into during 2023. The flip side is that rates may still be the same as they are now, in which case the next fixed rate could also be relatively high and the longer term option may have been a wiser choice in the first place.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this post is purely for information purposes only and does not constitute advice.
