To fix or not to fix?
As expected the Monetary Policy Committee, the body tasked with setting interest rates for the UK, kept rates at 0.5% this month. After months of speculation that rates were set to soar – followed by several more months of panic that we could see base rate fall to negative figures, consumers are no doubt confused as to what happens next. The Bank of England base rate is used by banks and lenders to set their mortgage rates so if base rate rises your mortgage rate rises and if base rate falls your mortgage rate follows suit. Unless, of course, you opt for a fixed rate which will remain the same for the duration of your mortgage deal.
At present the vast majority of borrowers are opting for the safe bet of fixing their mortgage. When rates first started to tumble those people who were coming to the end of a fixed period found themselves saving a small fortune. Many had been on a fixed rate mortgage paying 5 or 6% and suddenly found themselves paying 2 or 3%. Unsurprisingly a huge number of borrowers decided to stick with their lender’s default rate (a variable mortgage rate which can go up or down depending on what’s happening with interest rates). However, as rates hit rock bottom and lenders began offering very attractive fixed rate mortgages many borrowers opted to secure a great rate while they had the chance.
So, with so much uncertainty around which way rates will go, should you be fixing or not? Let’s look at the pros and cons.
The biggest benefit of fixed rate mortgages is they give you the peace of mind of knowing that your rate will remain the same for a fixed period. This can be hugely beneficial when it comes to making plans. You know exactly what your outgoings will be so there won’t be any nasty payment shocks, at least where your mortgage is concerned.
The downside is fixed rate mortgages tend to be a little more expensive than variable rates (you’re paying for the stability) and often come with an expensive penalty if you want to change mortgages (called an Early Repayment Charge).
Variable rate mortgages – either mortgages on your lender’s Standard Variable rate or tracker mortgages (so called because they ‘track’ the base rate) can be more attractive because the rates are usually lower. However, you should only choose a variable rate if you know you will be able to cope with a higher repayment should rates go up. Your mortgage broker will perform a stress test to ensure you could manage to make the repayment in the event of a payment shock.
If you’re looking for a mortgage and aren’t sure which is the most appropriate option visit us at We Know Mortgages Ltd in the heart of Manchester and we can help find the perfect solution for you.