The cost of fixed rate mortgages is rising in the short term, anyone considering a fix in the imminent future should get their skates on. Yet that doesn’t mean everyone should fix now…
The today’s Metro headline ‘Home loan time bomb as cheap deals go’ made for a very interesting read. I was quoted in the artice saying "We are sitting on a ticking time bomb in the mortgage market right now. Those who want to fix need do so now." This is on the back of yesterday’s inflation figures, which mean UK base rates are more likely to increase this year (some say it’ll be sooner rather than later, but of course no one knows and things can always change).
While the quote is accurate, it’s a bit frustrating that it’s only a short excerpt of what I said, and doesn’t really reflect the bigger image and the context I’d set. I find this often happens when I read back articles. So I thought it would be useful to jot down here what I was talking about and where the quote came from.
Actually that sentence contains two separate points I was making, that have been joined together…
- We’re sitting on a mortgage ticking time bomb. This isn’t about fixed rates, it’s about the fact that people think the current base rate is the norm, but the current base rate at the moment isn’t, it’s the anomaly.
Many people are sitting on variable rate mortgages at 3-4% over base rates, leaving them currently paying 3.5-4.5% mortgages which seems cheap. Yet actually, if interest rates bounced back to 5% (which historically is more normal see my mortgage rates since 1694 blog), then people would be paying 8.5%-9%, which for many is completely unaffordable.
This has happened as the margin on mortgages has grown immensely, they’re now much more expensive compared to base rates than they ever were before, and this is the ticking time bomb. For full info and what you can do about it, read my mortgage margin scandal editorial comment piece.
- Those who want to fix, need do so now. Actually the expanded version of this was ‘cheap fixed rate prices are going up right now, so for people who are in the process of fixing, the quicker you do it the cheaper. But that doesn’t mean everyone should fix, nor does it mean prices won’t come down again in the future’.
That means in the immediate situation, future prices are likely to be more expensive. Yet of course this is a market, if the prevailing attitudes change in 3 to 6 months we could see rates drop again. That’s why my call for people to fix now is only for those immediately considering it, rather than any long term call. In the long run, fixing is far more about surety than cheapness (see fixed v discount mortgages guide).
Now of course it’s also possible that this is the cheapest ever fixed rate period we’ve seen, and the worry is that by not fixing, people could miss the boat. To know the truth you’d need a crystal ball, which is why one option that people can consider is booking in a fixed deal now as an insurance policy.
With this you grab a fixed now for use in a few months’ time (you’ll pay £100 to £200) and if rates rise you’re quids in as you’ve got the cheap deal. If they don’t ,well that’s what insurance is all about, you don’t take the fix, lose the booking fee, but had peace of mind that you’d a cheap mortgage locked in. To do that it’s best to chat it through with a mortgage broker.
The key thing to understand is that the cost of fixed rate mortgages depends on the City’s long term view of interest rates, rather than any immediate fluctuations of the UK base rate. In recent months the 5 year swap market has risen substantially, meaning 5 year fixed rates are being pulled from the market or being replaced by more expensive deals.