With interest rates still at a high level and uncertainty over inflation, you may be questioning your mortgage options. Should you fix your mortgage now or wait to see what happens? If you do decide to fix, the next decision is for how long. Then, can you change it again if a better fixed-rate deal becomes available afterwards?
What is the benefit of having a fixed rate?
When you have a fixed rate for your mortgage, you benefit from the security of knowing exactly how much you’re going to pay each month. This means that even if interest rates increase, your rate will remain the same until the end of the fixed term. You won’t, unfortunately, benefit from lower monthly payments if interest rates start to come down. However, you can have peace of mind that you can afford your repayments as they won’t increase. This can save a lot of stress during this time of economic uncertainty.
This differs from a variable rate where your rate can fluctuate. A tracker mortgage changes in line with base rate changes. Standard variable rates (SVRs) are set by lenders and can change at any time and by any amount. The benefit of having a variable rate over a fixed one is that your monthly payments will reduce if rates come down. However, they will continue to increase each time interest rates go up.
The current situation with interest rates
After 14 consecutive base rate hikes, the Bank of England kept the rate at 5.25% this month rather than increasing it to 5.5% as had been widely anticipated. This was in response to a further decline in inflation to 6.7% and amidst concerns that a further rate hike may push the economy into recession.
Although the inflation rate is coming down, it’s still over three times the Bank of England’s target rate of 2%. As such, there’s still a possibility that the base rate may increase again in the future. Even without any further interest rate increases, they are set to remain at a higher level for longer. This is to ensure that inflation stays under control and gets nearer to the 2% target.
Should you fix your mortgage now?
Bearing the above in mind, the question of ‘should you fix your mortgage now?’ is becoming increasingly popular. Lenders factor in the base rate when pricing their mortgage deals, including any expected future interest rate increases. This means that current deals have already been priced allowing for a further rate increase.
Aside from that, some lenders have begun reducing their mortgage rates in response to the decreasing inflation rate. The Bank of England has predicted that inflation will decrease to 5% by the end of the year. Other experts have predicted that inflation will fall faster than that. These predictions should hopefully encourage more lenders to make reductions on their mortgage rates.
The Financial Conduct Authority (FCA) has advised that over 890,000 fixed-rate deals will reach the end of their terms by the end of the year. If yours is one of them, you may be undecided as to whether you should fix a new rate now or wait a bit longer in case better rates become available.
Fixed-rate deals are expected to be at about 5% by the end of the year. You can arrange a new deal 6 months before your current one expires. Therefore, it’s worth doing that now as mortgage rates are coming down. If they reduce even further, you can always change your mind and opt for a better deal instead.
It’s not recommended to just leave your fixed-rate deal to expire. This is because your mortgage rate will automatically revert to the lender’s SVR. The SVR tends to be higher than other interest rates. As mentioned earlier, your lender can also change it to any amount and without giving you any warning.
How long should you fix your mortgage for?
Another decision to make is how long to fix your mortgage rate for. If you need to fix your rate now but feel that mortgage rates are going to decrease in the future, it’s a good idea to consider a short fixed term. For example, 2 or 3 years.
If interest rates stay at the current level – or possibly go slightly higher – over the long term, which has been indicated by the Bank of England, it stands to reason that mortgage rates will also remain on the high side rather than coming down as hoped. In this case, fixing your rate for a longer term, such as 5 years, makes sense. You can then be certain as to how much your monthly mortgage payments will be for that period without worrying about unexpected increases in the immediate future.
On the other hand, if you’d rather just have the security of knowing what you’ll pay each month without the hassle of having to remortgage every few years, you may prefer a much longer fixed term. Many lenders offer 10-year fixed deals but longer options are also available, such as 25 years.
Is there a better alternative to having a fixed rate?
With inflation coming down and the decision having been made to keep the base rate the same this month, you may be unsure as to whether having a fixed rate is the best option for you. A tracker mortgage typically follows the base rate and changes in line with it. You may feel more comfortable with this option, especially if you think interest rates may start to come down in the near future.
If you opt for a tracker mortgage and this doesn’t happen, however, you can always change to a fixed-rate deal at a later date. Unlike other mortgage types, you’re not always penalised by lenders with an early repayment charge when you switch from a tracker mortgage to a new deal.
Get expert advice on whether fixing your mortgage is the right choice for you
There are a lot of factors to consider before deciding whether you should fix your mortgage or not. These include your affordability, the loan-to-value needed, your preference for certainty or the possibility of future reductions, rate predictions and how they will impact you either way, early repayment charges in case you decide to switch your deal at a later date and your future plans. For example, needing to move to a bigger home because you want to start a family.
Our mortgage brokers are here to help you make the best decision for your needs. With access to exclusive broker-only deals, they can compare your current deal with the alternatives available. Having assessed your situation and preferences, they can guide you on the best options for your circumstances. If you’re wondering whether you should fix your mortgage now or wait, give us a call on 01322 907 000. Our expert brokers will give you impartial advice that will allow you to make an informed decision.