Should you go for a fixed rate now or wait in case rates come down further? Paula John of Your Mortgage magazine weighs up your options
Fixed rate mortgages can be an eminently sensible option. When you opt for a fixed rate, you know exactly how much your monthly repayments will cost you, whether it be for the next six months, two years, five years or more. The predictability of the monthly mortgage payment gives the home owner peace of mind – as opposed to the uncertainty experienced by those with variable rate mortgages – and this accounts for the popularity of fixed rate loans. And in the present economic climate you can also get a good bargain. Bank base rates have been reduced three times this year – by just 0.25 per cent at a time, but the trend has been steady. Base rates now stand at 5.25 per cent and mortgage rates are not that much higher, ranging from around 6.24 per cent to 7.25 per cent at the time of going to press. Some analysts and economists believe that base interest rates will come down again this year – although few think they will fall below five per cent unless the global economy is in serious trouble. So if you're considering taking out a fixed rate, should you strike while rates are reasonably-priced or wait for them to (possibly) come down further?
Act now
Many experts, even those predicting a further cut in interest rates, would advise you to sign up to a fixed rate as soon as possible. This is because the money markets have already factored in a 0.25 per cent cut in their calculations. So the money they lend mortgage providers will not get any cheaper. And lenders have to price their products accordingly. ‘At the beginning of June, a large number of mortgage lenders increased their fixed rate deals by between 0.1 per cent and 0.35 per cent, and this trend looks set to continue,’ says Ray Boulger, senior technical director at mortgage adviser Charcol. ‘So borrowers who want a fixed rate would be advised not to wait.’ John Butler, economist at HSBC, agrees. The bank predicts that rates will come down, maybe by as much as 0.5 per cent, by the end of the year, due to a global slowdown. And yet, Butler says, ‘If I were taking out a mortgage or remortgaging right now, I would go for a fixed rate. There is a lot of uncertainty regarding what will actually happen to interest rates, and holding out for a further cut is just too risky. The potential loss if the US does rebound and rates spring up is simply not worth it.’
A good deal
As a rule of thumb at the moment, if you can get a fixed rate under six per cent you've got a good deal. Quite how long you want to fix the rate for depends on what you think might happen to interest rates. Sadly no one can guarantee future interest rate movements. But as long as you opt for a mortgage that does not tie you in with early redemption penalties after the end of the fixed rate period, you should be playing it safe – and getting a bargain along with peace of mind.