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Mortgage rate uncertainty

Over the last few years we’ve enjoyed a stable economic environment, with little fluctuation in interest rates. However, the recent increase in inflation to 3.1%, against the Government target of 2%, suggests that we may be moving towards a more volatile economic period.

With many of us already feeling the pinch from three interest rate rises in the last nine months, it’s no surprise that with further increases on the horizon, there’s been a rush amongst homeowners to fix their mortgage repayments.

During the period when interest rates were stable and mortgage fees at a more affordable level, two-year fixed rate mortgages were extremely competitive and consumers would move from one short-term deal to another. With interest rates forecast to continue to rise, we have evidence from mortgage lenders that their customers are starting to look for longer-term repayment stability with many now opting for five-year fixed mortgage rate deals or longer.

There is a vast array of mortgage products available, but deciding what’s right for you depends upon your own financial circumstances and attitude to risk e.g.

• Whilst you might pay a slightly higher interest rate (plus an arrangement fee) for a fixed rate mortgage, you will have the peace of mind that your mortgage repayments will be fixed for a set period thus protecting you against further interest rate rises in the short-term.
• This may be an important consideration for anyone taking on a large mortgage.
• The downside of fixed mortgage rates is that it’s difficult for anyone to predict exactly what will happen to interest rates over the next five years, so there is a risk that you might end up paying a higher interest rate on a fixed rate mortgage if interest rates come down below what they are now.
• You’ll also be locked into your fixed mortgage rate and incur a hefty indemnity penalty if you want to leave before the end of the fixed rate deal.

On the other hand, if your mortgage repayments don’t make up a large proportion of your monthly outgoings and you have a comfortable level of disposable income available each month, you may be prepared to sit it out and see what happens with interest rates during the next few months before deciding whether to take the plunge.

You will also find that a two year discounted variable rate mortgage is currently cheaper than the fixed rate equivalent, thus saving you money. For example, the Newcastle BS are top of the Moneyfacts Best Buy chart for discounted variable rate mortgages with a rate of 4.65% for two years, which compares to a rate of 5.07% for their two-year fixed rate mortgage best buy.

The message here is that there’s no single mortgage that’s right for everyone. Everyone has their own financial circumstances and your choice of mortgage will depend on factors such as the equity in your property, the amount you want to borrow, and for how long you want to borrow the money.

What to do next:

To ensure you get the mortgage that right for you, do a little homework and check out what sort of mortgages and deals are available in the Moneyfacts’ mortgage guides and best buy charts.