Has the time come for a five-year mortgage fix?


With fears that interest rates will rise sooner rather than later, we look at whether to lock in before good mortgage fixes disappear

Many homeowners and buyers have been rushing to fix their monthly mortgage payments to protect themselves from the risk of interest rate rises – so should you be joining them?

UK unemployment rate falls to 7.1%

Mortgage rates remain at historic lows: those with a sizeable amount of equity in their property can get a five-year fix at below 3%, and a two-year fix for less than 1.5%. But some of the best deals have been withdrawn during the past few days, and Wednesday’s news thatunemployment has fallen more sharply than expected has sparked fresh debate about whether interest rates may be set to rise sooner rather than later – perhaps even this year.

The Bank of England base rate has been held at 0.5% since March 2009, and most economists still think it won’t rise before 2015. However, the fall in unemployment, combined with the fact that the economy is picking up, has prompted some economists such as James Knightley at ING to conclude that “the probability of an interest rate rise in 2014 is increasing”.

A rise of 0.25% will add roughly £20 to the monthly mortgage bill of someone with a £150,000 repayment loan, assuming they were on a base-rate tracker or standard variable rate deal. Many people would be able to absorb that. But what if borrowing costs really start to march upwards? As our table shows, someone with a £150,000 variable-rate repayment mortgage, who currently pays a low-ish 2.5%, would see their monthly outlay rise from £673 to £921 if their rate climbed to 5.5%.

If you are thinking about remortgaging you probably need to get your skates on, because if the odds of a rate hike this year are shortening, banks will start repricing their deals – ie, new fixed rates will become more expensive.

What deals are around?

There are some good fixes out there, particularly for those with plenty of equity or a large deposit. Tesco Bank’s five-year fixes start at 2.79%, though that is for those borrowing a maximum of 60% of the property’s value, and the fee is a chunky £1,495.

Yorkshire building society has two sub-3% five-year fixes – one at 2.84% with an £845 fee, and the other at 2.94% with a £345 fee. The maximum loan size is 75% and 65% respectively. NatWest has a five-year fix at 2.88% for those borrowing up to 60%, where the fee is £995. Remortgagers receive a free valuation and get their legal fees paid.

Other good fixed rates over five years include the 2.95% deal offered by Barclays. On that rate, the maximum loan is 60% and the fee is £999 – reduced to £499 if you hold a Barclays current account.

Should I fix now?

Plenty of people already have: 88% of homebuyers and remortgagers who took out a mortgage in November opted for a fixed rate, according to the Council of Mortgage Lenders. That’s thought to be the highest level since the organisation began collecting data 20 years ago.

Just over a week ago, a senior member of the Bank of England suggested people should fix their mortgages to protect themselves against a “real risk of exposure to rising interest rates” in the coming years. Richard Sharp, a member of the Bank’s financial policy committee, told MPs that, based on his own judgment about when the base rate would rise, he would opt for a fixed-rate mortgage: “You have to make a judgment about the future. Certainly, my judgment would be this would be a good time to fix your mortgage.”

On Wednesday, it emerged that Britain’s unemployment rate had fallen to just a whisker above the 7% level at which the Bank of England said it would consider raising interest rates. The Bank isn’t desperately keen to raise rates, and may buy itself some time by lowering the threshold from 7% to 6.5%.

If you’re on a cheap lifetime tracker mortgage, moving to a fixed-rate deal probably isn’t going to stack up financially when you look at what you are paying now versus what you’ll pay if you switch. The same applies to many of those sitting on Nationwide‘s “base mortgage rate,” currently 2.5% and guaranteed to never be more than 2% above the base rate.

But the maths will, of course, change when interest rates start rising – the table will give you a flavour of what rate rises mean for monthly payments.

Some people will be willing to pay a premium for the protection offered by a five-year fixed-rate mortgage, where you know your payments can’t rise until at least early 2019.

Ultimately, as ever, it comes down to how tight your finances are and/or whether you’ll be kept up at night worrying. If you can’t afford to get the interest-rate guessing game wrong, or you don’t want to live with the fear of rates rising, fixing is the way to go.

Are the best deals gone?

It’s true that some decent fixes have been pulled – the Yorkshire and Coventry building societies are two of the lenders that have withdrawn deals in the last fortnight – but there’s still plenty of good stuff available.

Mark Harris at mortgage broker SPF Private Clients says: “While it’s important not to panic as fixed rates are still incredibly cheap, there really is only one way for pricing to go – and that’s upwards. If you need to remortgage in the next few months, it’s worth looking at what is available now, and securing a deal in advance. Some lenders will let you secure a rate up to six months before you need it, so you can lock into a cheap fix now.”

We’ve been here before

Will interest rates take off?

For some people, all this will have created a sense of deja vu. Almost three years ago to the day, on 22 January 2011, Guardian Money was reporting on the fact that the money markets were pricing in three 0.25% Bank of England rate rises by the end of that year, prompting some mortgage lenders to pull their best fixed-rate deals. “Soaring interest rate on the way” and “Home loan time bomb as cheap deals go” were just two of the front-page headlines in other newspapers that week. If you took out a two-year fix then you may feel now, with the benefit of hindsight, that you wasted your money.

It’s a reminder that trying to predict future interest rate movements is about as scientific and robust as using tea leaves to read people’s fortunes.

Five-year vs two-year fix

Two-year fixed rates are cheaper, though watch out for big fees. For example, West Bromwich building society will let you fix your payments at just 1.48% if you’re borrowing no more than 60%, but the fee is a whopping £2,499 (if you only want to pay a £99 fee, the rate rises to 2.09%).

The obvious downside of these loans is that they only give you two years’ protection from rising interest rates – so your deal could be coming to an end just as borrowing costs are beginning to soar.

Harris says: “While two-year fixes are lower than their five-year equivalents, it might make sense to opt for the latter. Although there is an outside chance of an interest rate rise in the next couple of years, over three to five years the chance of a rate rise is far more likely, and a five-year fix will give security over the medium term.”

But, he adds, don’t fix for longer than you’re absolutely sure about, or you will face a early repayment charge to exit the deal before the end of the fixed period.

Meanwhile, a two-year fix can sometimes make sense for those putting down a small deposit of perhaps 5% of the property’s cost, says Ray Boulger at mortgage broker John Charcol.

He points out that all high loan-to-value mortgages now have to be on a repayment basis, so after two years the borrower would have typically repaid around 4% of the capital. If you couple this with the probability that the value of most homes will rise by at least 6% over the next two years, this should push their all-important LTV – which dictates the deals you can access – down to 85% by that point, he says. The mortgage deals at 85% are much more attractive than those available to those who have to borrow 95%.

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