Is it time to fix your mortgage rates?
We’ve enjoyed a long period of low-interest rates in the UK, but creeping inflation and economic growth is putting more pressure on the Bank of England to raise rates.
While low-interest rates have left many savers frustrated at meagre savings rates, at the same time it’s been a period of fantastically low rates for mortgage borrowers.
The Bank of England base rate has been below 1% since March 2009, but it’s looking increasingly likely that this could change in the near future. If it does, mortgage borrowing could quickly start to become more expensive.
How high could rates go?
This isn’t something anyone can say for certain.
Looking at the latest monetary policy report from the Bank of England, their current expectation is that the base rate will rise modestly to around 1.5% by 2023.
However, this doesn’t take into account the latest developments in Ukraine and the potential ongoing impact economic sanctions could have on both the UK and the global economy. This is only likely to increase inflationary pressure as global market prices climb making a base rate rise seem even more likely.
The Bank of England also has an inflationary target of 2% and their expectation was it would hit 7% in the Spring. This again was before the Russian invasion began, so doesn’t consider any potential economic fallout from the Ukraine crisis factored into the mix. If inflation in the UK continues to accelerate, then a base rate rise is one of the few tools the Bank of England has at its disposal to combat it.
It’s easy to forget that the base rate was over 5% in 2008 and over 10% back in 1992, so rates below 1% are a long-term anomaly and not typical.
How does the base rate affect tracker rates?
If you have a tracker, discounted or variable rate mortgage you will have benefitted from super-low rates for a long time now.
Tracker mortgages directly track the Bank of England base rate, usually by a set margin.
For example, a tracker mortgage with a 0.99% margin would currently have an all-in rate of 1.49% (0.5% + 0.99% = 1.49%).
This means that as soon as the base rate increases, so too does your tracker mortgage rate.
Taking the most recent estimate from the Bank of England, this could see a typical tracker mortgage rate reach 2.49% by 2023, which is considerably higher than many 5 and 10 year fixed rate mortgage deals still on offer today.
Why should you fix Your Mortgage Rate?
Fixing your mortgage rate protects you from rising interest rates and gives you security over how much you will have to repay each month. It essentially removes the risk of interest rate changes for the duration of your fixed rate.
The pay-off for this is that fixed rates are at least initially a little higher than the lowest variable rate mortgage deals in the market.
However, if rates do rise, which looks increasingly likely, then locking in a low fixed rate now could still prove a money saver in the long run. While a tracker rate mortgage could be cheaper right now if rates go up by 1% or more then that saving could disappear altogether.
It’s also worth considering the inflationary impact on other household bills. We have already seen a big jump in household gas and electricity bills due to rising wholesale energy costs and many broadband suppliers have also announced price hikes in recent months.
If you couple that with soaring food prices, locking in a fixed monthly mortgage cost that is guaranteed not to increase might start to look more and more appealing – in fact thousands of borrowers have already rushed to remortgage in recent months.
The best fixed-rate deals are going fast
If you do want to lock into a cheap fixed rate mortgage deal, then time isn’t on your side.
It seems that news of upcoming rate increases hasn’t gone unnoticed and we’re already seeing some of the lowest five and ten year mortgage rates being withdrawn from the mortgage market.
Reserve your Mortgage rate and wait…
If you’re still loathe to give up your low-rate tracker deal right now there is another option that might allow you to hedge your bets.
Whether you have a small or large mortgage, many lenders allow you to effectively reserve your mortgage deal for anywhere up to six months before drawing down your borrowing. This means you could apply now to secure a low-rate long term fix and then wait to see if rates do start to climb.
It might also mean you can squeeze out a couple of months on a lower interest rate before jumping ship to the safety of your new fixed rate deal.
If rates then don’t begin to climb as most analysts currently predict they will, you can choose to remain with your existing variable rate deal if you wish instead.