Last November we saw the first Bank of England interest rate rise in a decade, when the base rate of interest moved back from its lowest ever point of 0.25% to 0.50%. Since then, the Chancellor of the Bank of England, Mark Carney, has openly discussed that the base rate will increase at some point this year and next, meaning that consumers will see higher mortgage in the near future.
How much will the base rate of interest rate go up and when?
No one knows the answer to this, of course, but what we do know is that the next Monetary Policy Committee announcement will be made on 10th May, which means that if there is to be an interest rate in the next month, it will be announced that day.
What does a change in the interest rate mean if you’re moving house now?
In real terms, the best way to mitigate the threat of rising interest rates is to take out a fixed rate product, meaning that your monthly mortgage payments will be guaranteed for the term of the fix. This has a lot of benefits, as it means that if interest rates go up during that period, your mortgage payments will stay the same, potentially saving money but also making it easier to budget your household expenditure every month.
Over the last few years, typically the cheapest fixed rates have been on two year fixed deals, and indeed looking at the current raft of rates available it’s still possible to get a fixed rate of less than 1.5%. However, with the political and economic uncertainty of Brexit still looming large, many customers are now opting for a longer term of five years to fix their mortgage. The rhetoric being that it gives the UK economy long enough to stabilise following the UK’s exit from Europe in 2019.
Recently though, another option in the form of ten year fixed rate mortgages have started to gain traction, with some consumers believing that borrowing will never be as cheap again as it is now, and therefore opting to fix their mortgage at the lowest amount for the longest possible amount of time. A quick scan of the market shows that it’s possible to obtain a fixed rate mortgage at under 2.6% for ten years which, in certain circumstances, provides a level of security that previously would have been very hard to achieve otherwise.
But just because you can fix your mortgage for two, five or even ten years, doesn’t necessarily mean that you should, as there are some pretty important factors to consider.
Should you take out a fixed rate mortgage?
The key thing to remember is that security comes at a price, and that should you decide to move home or change your mortgage lender during the period of your fix-term product, you are most likely going to have to Early Repayment Charges (or ERC’s for short) that you have to pay to exit the mortgage. These can vary but are normally 3% of the outstanding mortgage balance, which can run into thousands of pounds.
So when weighing up if you’d like to take a fixed rate product or not, it’s important to consider your circumstances and if you think you’d need to move home during the term of the product. If you feel that you’ll be settled for five years as a minimum with no need to move home, then it may make sense to consider a fix for that time, rather than ten years, as you may find that your circumstances change within a decade which can lead to a costly exercise to exit your mortgage.
Some fixed rate products do come with the ability to take your mortgage with you when you move and apply the rate and amount borrowed to your next property, a process known as ‘porting’ your mortgage. So, it does make sense to ask your mortgage adviser not just about Early Repayment Charges but also if the product is portable, before you sign on the dotted line.
Fixed rate mortgages aren’t right for everyone. Let’s face it; one size most definitely doesn’t fit all. But whether the interest rate goes up on May 10th or later this year, a fixed rate does provide certainty that at least your mortgage won’t increase too. And for some people, that may be a very welcome thought indeed.