Of all the decisions that homeowners need to make, there are few that are as significant as ones relating to their mortgage. That can have a tangible impact on your monthly expenses, as well as your long-term financial health.
It’s not a decision that should be taken lightly. Given the importance, it’s vital that homeowners looking to remortgage their properties have as much information as possible to help them to make the correct decision.
This has always been true, but it’s of greater importance at the moment when mortgage rates are in transition. The cost of living crisis has pushed the Bank of England to hike interest rates, and there’s every chance that they may continue to rise through to the end of 2022.
All of this leaves property owners with big decisions to make regarding their mortgages. In this blog, we’ll offer some mortgage guidance. We’ll look at the pros and cons of fixing your mortgage, analyse the likelihood of the rates continuing to rise, and the various term lengths you can choose from.
Should you consider fixing your mortgage?
The short answer is: yes, you should consider fixing your mortgage. However, that’s not to say that it’s right for everyone. Much of it depends on your personal circumstances, but there are good reasons why homeowners should explore moving to a fixed-rate mortgage, especially right now.
What is a Fixed Rate Mortgage?
But before we dive into the reasons why fixing your mortgage is a good idea, let’s outline what it is. Fixed rate mortgages are the most popular type of mortgages, but they’re not the only ones. The other option is a variable mortgage.
The clue to fixed rate mortgages is in the name. This is a fixed, stable rate; in other words, the interest rate is locked in. It won’t change during the mortgage term period.
Variable mortgages have fluctuating prices that (usually) move in line with the interest rates set by the Bank of England. If the interest rate moves down, then you’ll pay less; if it moves up, then you’ll pay more.
It’s a simple enough concept, but that doesn’t make it an easy decision. There are pros and cons to fixed rate mortgages, as we’ll see below.
The main advantage of getting a fixed-rate mortgage is that you know exactly how much you’ll pay over the lifetime of the mortgage period. If you have a ten-year fixed rate mortgage, then you’ll pay the same each month, regardless of what’s going on with the interest rates.
There’s comfort in having predictable payments. And that’s especially true during times of uncertainty, such as right now when there’s a chance that interest rates will continue to rise. People on a variable rate could see their mortgage payments increase, and by a significant degree.
Fixed rate mortgages do away with that worry. You’ll have peace of mind that no matter what happens, you’ll be paying the same amount.
The advantage of fixed rate mortgages can also be their weakness. When the rate is locked in, you’ll avoid the risk of having to pay more money because of rising interest rates.
However, that also means that you won’t be able to take advantage of paying less money should interest rates fall. So fixed rate mortgages are not without their risk.
The decision usually comes down to the homeowners’ view on the long-term outlook for interest rates. If you think that they’ll be moving up, then a fixed-rate mortgage would be more appealing. If you think that they’ll move downward, then a variable rate would be more appealing.
Are Interest Rates Likely To Rise?
Happily, homeowners don’t have to rely on their own intuition regarding interest rates. There are usually plenty of signs that they may move up or down.
And at the moment, all the signs are suggesting that they’ll go up. And the reason for that is that interest rates have been going up at every meeting since December 2021. The current cost of living crisis makes it likely, even certain, that they’ll continue to go up throughout the year.
Inflation often happens as a result of low-interest rates. The Bank of England took interest rates to historically low levels in response to the coronavirus pandemic. As a result, inflation took hold. And the way to combat inflation is to raise interest rates; it’s usually the first play in the book for getting a hold on inflation. If inflation continues to occur, then interest rates will go up because if they don’t, inflation could get out of control.
Experts believe that inflation could hit 10% by autumn 2022. While it’s not confirmed, it’s likely that the Bank of England will continue to raise rates. It’s likely that interest rates will hit 2% by February 2023 and more than 2.5% by the end of that year.
For people on a variable rate, that’ll mean the cost of their mortgage will go up. And that’s the main reason why we’re seeing so many people moving towards a fixed-rate mortgage. It makes perfect sense: if all the signs suggest that you’ll have to spend more money in the future, then you’ll do something that helps to prevent that from happening. And that’s just what a fixed-rate mortgage can do.
How long should you fix your mortgage for? 2, 3, 5, or 10 years.
You’ll have a range of term lengths to choose from if you select a fixed-rate mortgage. The mortgage deal can be anywhere from two to ten years and in some cases, even longer.
If you’ve decided that you like the predictability of a fixed rate mortgage, then you’ll next need to think about the time period that you choose. Choosing the right mortgage length can prove to be very costly, so this decision is almost as significant as the decision to go with a fixed rate mortgage in the first place.
You’ll get the best deals on two-year mortgages. That’s because lenders are not eager to offer low long-term rates because they also don’t know which way the market will go. It’s hard to predict where it’ll be in ten years, for instance. For this reason, ten-year rates are the most expensive option.
There are pros and cons to all lengths. If you opt for a two-year deal, then you’ll be paying lower rates, but those rates could rise significantly once the two years are up. If you choose a ten-year deal, then you’ll be locked into your price for a decade. If interest rates fall significantly, then you’ll end up spending more than you would have if you’d selected a shorter deal.
Most borrowers and lenders like to go for the middle-ground option, with five-year mortgages being the most popular. It’s important to remember that you’ll effectively be tied into your rate for the duration of the period. While it’s possible to leave early by paying off the balance, there are usually very high penalties for doing so. If you sign a ten-year fixed rate, you should expect to be paying that rate for a decade.
Finding the right fixed-rate mortgage for you
As we’ve seen, there’s no shortage of mortgage options out there, and making sense of them can be a little confusing. It’s important, however, to really take your time to ensure that you choose the mortgage that’s right for you. Making the wrong selection can lead to big financial problems.
There are a few things you can do that’ll push you towards getting the right fixed-rate mortgage. The first is to think about your circumstances and whether they’re likely to change in the coming years.
For instance, if you’re planning on having a baby in two years, and will thus consider moving house, then a ten-year fixed-rate mortgage would make no sense. Shorter terms give you the option of moving in the near future. On the other hand, if you’ve got no plans to move, then a five-year rate could be the way to go.
You should also look at the Bank of England interest outlook. If it looks like it’s going to rise significantly in the coming years, then the security of a longer-term fixed-rate mortgage can bring some peace of mind. This is the situation that we find ourselves in now, hence the growing interest in people trying to secure longer-term deals. Many people are choosing ten-year deals based on this bleak outlook.
The final piece of advice? Work with experts that will help you make the right decision. If you’re looking for mortgage advice in and around Droitwich or Worcester, then be sure to get in touch with us here at the main SN Financial Services branch. Alternatively contact our office in Sevenoaks, Kent if you are based around this area.
Our expert financial team is committed to finding tailor-made financial solutions for our clients. By combining excellent technical knowledge and outstanding customer service, we’ve built a first-rate reputation for providing financial advice that you can trust. If you’re ready to get started, give us a call on 01905 779697 or 01732 926 255, and we’ll be happy to assist you in any way we can.