The fixed-rate mortgage tumble

What does it all mean? Jane King explains what you need to consider when applying for a fixed-rate mortgage and when it may not be suitable for your situation.

Fixed rates!  The most popular choice for both purchasers and re-mortgages for several years.  They are a sensible choice if you wish to budget into the future knowing exactly what your mortgage repayments will be each month.  Usual terms are two, three and five years, but in recent years, ten-year fixed rates have been introduced and have proved popular with homeowners who are settled in their home and looking for long-term stability.

“If you are looking for some stability, and would like to budget for your mortgage repayments, then you should be fixing your rate”

Variables, trackers and fixes, oh my!

Up until the bank-base rate tumbled in 2009, fixed rates were slightly more expensive than variables, such as trackers.  There was a premium to a pay for the luxury of peace of mind, although many borrowers were happy to pay this.  Otherwise there was the choice of trackers which had lower rates but were uncertain.  Then many lenders introduced a new idea of tracking with the option to fix later.  These were incredibly popular as it gave borrowers the best of both options – able to take advantage if interest rates fell with the option to fix if they started to rise.  These mortgages do still exist and for some borrowers are still relevant.  Now with bank base rate at a historic low of 0.5 per cent (and unlikely to fall further) and money from the ‘funding for lending’ scheme, fixed rates are the same, if not cheaper than variable rates.  With two-year fixes now starting at under 2 per cent, many  independent advisers will  consider fixed rates as their first choice when advising clients.

Funding for lending scheme

Investment landlords looking for buy-to-let financing have also been enjoying low-fixed rates, which has enabled them to plan the financing of their investment properties into the future.

The funding for lending scheme has also allowed the re-introduction of low fixed rates for borrowers with small deposits with 90 per cent and 95 per cent mortgages becoming available again after they all but disappeared when the credit crunch began in 2008-09.

When a fixed-rate mortgage isn’t appropriate

As with any product, fixed rates are not suitable for everyone and here are some examples of scenarios where that might be the case:

• Borrower wishing to repay mortgage before end of fixed rate – repayment penalties on early redemption of fixed rates can be onerous, although most will allow you to make limited overpayments.
• Borrower may wish to move before end of fixed rate to self-build or rent property out – most lenders will not allow you to transfer your mortgage to these type of properties or convert to a buy to let
• Borrower may wish to sell up and move abroad – again early repayment penalties should be taken into account.

Points to consider if you’re considering a fixed-rate mortgage

If you are considering a fixed rate for your mortgage then you need to look beyond the headline rate which is designed by lenders to attract your attention.  Think about:

• What are the product fees? Lenders often offer a sliding scale of rates where slightly higher rate attract product fees. Your adviser can do the calculations and let you know which is cheaper overall, especially if your mortgage is small.
• What is the lenders reversion rate? Some lenders’ standard variable rates (SVR) are quite high and so the exit plan should be taken into consideration.
• Is the lender offering any incentives? Free valuations, legal costs and product fee options can save a considerable amount on upfront costs which may be important to you, especially if you are a first time buyer or your mortgage is small.
• Flexibility. Does the lender allow overpayments and underpayments?  Not all lenders do and if you want these options you should ensure they are provided
• Portability. Will you want to move during the term of your fixed rate?  If there is the possibility you should ensure this facility is available otherwise you will need to redeem the mortgage early and be subject to early redemption penalties.
• Property. Will the lender offer the rate for the type of property you wish to purchase?  High rise, ex-local authority, freehold flats are often not acceptable to some lenders.

Commentators and financial experts are currently uncertain as to when interest rates are likely to start rising.  Mark Carney, governor of the Bank of England has indicated in this “forward guidance” speech that he would recommend rates stay low until unemployment falls below 7 per cent, however if the economy continue to recover some economists are predicting a rise in early to mid-2015.  Needless to say that if you are looking for some stability and would like to budget for your mortgage repayments then you should be fixing your rate.

Speak to a mortgage adviser today to get the best advice for your situation.