Is now a good time to switch to a fixed rate mortgage?
It’s over seven years since the Bank of England raised interest rates and, as a result, a whole generation of home buyers on a variable rate mortgage have never had to come to terms with a rate rise.
This is, of course, good news for those on variable rate mortgages, but it also means that many may be unprepared to deal with a rise if and when it comes. In fact, insurance company Aviva says that as many as 1.5 million first-time buyers have never had to cope with a rise in interest rates. And although house prices have risen steadily throughout this period, the cost of coping with a mortgage hasn’t, meaning that for those prudent enough to save for a viable deposit, the effect of this inflation has been minimal. For example, in 2010, first-time buyers spent an average of 20% of their income on mortgage costs, while it is currently thought that the figure is somewhere between 18% and 18.5%.
Given this situation it is little wonder that the number of first-time buyers in the UK rose by 120,000 between 2008 and 2015 taking advantage of interest rates that fell from an average 4.51% in 2008 to an average rate of 2.71% in 2015.
However, unlike those on fixed rate mortgages, it is likely that those currently benefiting from variable deals will at some point have to accept the inevitable vagaries of the market, but the question is, will they be sufficiently prepared to cope?
It can be difficult. If you have got used to a certain level of income and expenditure, your lifestyle is likely to reflect this. Any change, therefore, will probably come as a shock – and there can be no doubt, rates will go up; it is only a few months ago that many experts were predicting that Mark Carney, Governor of the Bank of England, would finally implement a rate rise.
And, given that rate rises often come more quickly and dramatically than consumers are prepared for, now may be a good time to switch to a fixed rate mortgage.
For example, if rates go up by a couple of percentage points and house prices fall or stagnate, suddenly the scope to remortgage becomes greatly reduced and the personal finances of borrowers can be placed in peril, particularly for those on a high loan-to-value mortgage. The ramifications for those caught in such a situation are as clear as they are undesirable, while for many rate rises could lead to them being saddled with an unsustainable mortgage.
However, it is worth bearing in mind that having greater equity gives borrowers significantly more bargaining power when it comes to finding a good fixed rate mortgage deal, so timing is of the essence; switch to a fixed rate deal too soon and you may get a less advantageous deal, leave it too late and it may well be to your detriment.
Looking for a new deal
If you are considering switching your mortgage deal, there are a number of things to consider. These include the following:
- What is your existing rate? How much do you pay each month and how much do you owe? Comparing your rate against others on the market, do you feel you’re overpaying?
- Are you on a fixed rate, tracker, discount or variable mortgage?
- When does your mortgage deal end and what kind of penalty applies if you end it early?
- What is your loan-to-value ratio? If you are unsure, you can calculate it here.
One thing is for certain; when mortgage interest rates rise – and they will rise – some homeowners will be in trouble, so it pays to know where you are as soon as possible and keep your eye on the banking ball.