Currently, it’s estimated that 86% of mortgages are fixed, most of these for 5 or more years. And there is good reason for so many people being on fixed, rather than variable-rate mortgages.
Up until 2022, the Bank of England base rate had been under 1% for 13 years, since February 2009. That led to some of the lowest mortgage rates in UK lending history and meant that, as recently as September 2021, homeowners and buyers could fix mortgage rates for less than 3%. In some cases, those with high levels of equity could secure two-year fixed rates at below 1%.
However, over the last 12 months, with base rates rising rapidly from 0.1% to 4%, fixed-rate mortgages are now around 5% on average (source: Moneyfacts), although it is possible to secure some fixed rates for 3.75%. And with forecasts that the bank base rate may fall in the future, potentially reducing the cost of a fixed-rate mortgage, it’s worth re-visiting the pros and cons of fixing.
#1 The reassurance of consistent payments. Fixing your mortgage for two or more years means you know exactly how much your monthly mortgage payments will be during this time, which could be a help through the current cost of living crisis that’s been caused by high levels of inflation.
#2 Protection from payments rising. If inflation isn’t brought under control, the base rate could rise further this year, forcing up mortgage payments for those on variable rates.
#1 Paying more than necessary. If you fix your mortgage now when many are forecasting the base rate will fall, you could end up paying more than you needed – albeit, you’ll only know that with hindsight!
#2 Missing the benefit from future rate falls. If inflation falls faster than expected and the bank base rate follows suit, you won’t be able to take advantage of future falls in mortgage rates until your fixed deal comes to an end.
#3 Early redemption charges to get out of the deal. If rates do fall and you either want to switch your mortgage or you decide to move within your fixed-rate period, you may have to pay an early exit fee, which could cost you thousands of pounds.
And it’s important to know that fixed-rate mortgages can also attract higher fees and you may be restricted to how much you can overpay should you wish to do so.
Over the last decade or so, everyone has been very used to fixed-rate mortgages being ‘the sensible choice’, but as rates are expected to fall in the future, there’s more to consider. Although fixing may still be worthwhile, for those that can take the strain of rising and falling mortgage payments it may be better to consider a variable rate, especially if it’s discounted or a tracker.
To help understand the right choice for you, it’s essential to speak to a mortgage broker. This is even more important in uncertain times when we are seeing rates change so often and some mortgage lenders are announcing new deals every week.
So, if you’re considering buying your first home, investing or re-mortgaging, it’s worth speaking to one of the experts at our sister company, Mortgage Scout, who will work with you to find the right mortgage for your own personal circumstances.
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