There are thousands of mortgage deals out there: plenty of choice and oodles of competition mean there are good deals to be had. And with interest rates at a 38-year low, they are cheap. However, selecting the right deal for your needs can be a bewildering process. Paula John of Your Mortgage magazine talks us through some of the types of loan available
Just selecting the right type of mortgage is confusing. Should you choose a variable rate, discount, fixed rate, capped rate, cashback, base rate tracker or a combination? Well, right now, fixed rates and discounts are the most popular options. Currently the UK base rate is just four per cent, and mortgage variable rates range from 4.74 per cent to 5.89 per cent.
But interest rates are widely predicted to rise this year and while it is unlikely that rates will shoot up substantially by December, for example, who knows what could happen in years to come? Is it worth locking into a fixed rate in order to protect yourself against the vagaries of potentially fluctuating interest rates?
Fixed mechanics
In order to offer a fixed rate mortgage, a lender goes to the money markets and borrows a 'tranche' of money fixed at a certain rate. The lender then adds on a margin – usually around one per cent – and offers the rate to borrowers. The money markets predict what is likely to happen to interest rates in the future – a year hence, say.
So if a borrower goes for a fixed rate mortgage now, they are already paying the higher price, even though the increase may not happen. Or at least not on that scale.
Plain sailing
Ray Boulger of Charcol suggests you look at what the base rate is likely to do in future. Fixing your rate is a good option if you think the base rate will go up substantially. You will pay at least one per cent more for a fixed rate than a discount, at least in the shorter term. So, according to Boulger, you should only go for a fixed rate if you believe that base rate will go over six per cent in the next year.
Long-term outlook
Other experts believe that it is important to take a longer-term view. While the most popular fixed rates at the moment are two-year deals with no tie-ins, they argue that a five-year fixed rate can bring more value and security.
‘If you want to keep your mortgage for five years, you cannot go wrong with a fixed rate mortgage,’ advises mortgage expert John Wriglesworth. ‘The only downside to having a fixed rate mortgage could possibly be if you thought you might leave the country and travel the world, for instance, or that you were to come into an inheritance in a couple of years and would use the money to pay off your mortgage. In that case you would want a flexible mortgage.’
Watertight
But at what point could fixed rates get too expensive? If a fixed rate is substantially higher than a discount, then surely people should be going for the discount? ‘Absolutely not,’ says Wriglesworth. ‘The rate at which fixed deals are charged is based on forward markets. If fixed rates start getting higher, that is because the markets anticipate a rise in base rates.
In your bones
Sadly, even the greatest expert cannot accurately predict what is going to happen to interest rates. Analysts and the market do get it wrong. So the choice of whether to go for a long or short-term fixed rate or a discount really rests on your attitude to risk and your own feeling about what will happen to rates in the future. The most important things to remember once you have decided are to shop around for the best rate and to ensure that the deal does not tie you in at the end of the term.