Homeowners with standard variable rate (SVR) mortgages and deals linked to the base rate, such as trackers, have enjoyed more than five years of lower payments. But if and when the base rate starts to go up, those not on a fixed-rate deal will start having to shell out more each month to keep their bricks and mortar.
Locking down your rate with a fixed deal could protect you against base rate hikes for up to five years. But, as the average cost of a fixed rate deal goes up and base rate remains static, is fixing the right decision?
Here’s a look at whether or not now is the time to fix your mortgage.
The effect of rate rises
The Bank of England base rate hit 0.5% in March 2009 and has remained there ever since. While savers have been adversely affected, borrowers have benefited from the prolonged period of low interest rates.
According to The Money Charity, borrowers in the UK are paying less interest on their debt than at any point in the last decade – despite record levels of lending by banks.
Homeowners are paying less interest than at any point since April 2004, even though levels of outstanding mortgage debt have risen by 58% over the last 10 years. Mortgage interest rates are at their lowest since 1998.
If you don’t have a fixed rate mortgage, though, you’ll be affected when rates start to rise. This could be particularly difficult for homeowners on tight budgets even while rates are low.
Based on the average house price of £183,462 (Halifax House Price Index, June 2014) we can estimate how much of an effect base rate rises could have.
If you put down a 20% deposit on an average-priced property, took a loan for £146,769 over 20 years at a rate of 4.00%, and the rate you pay went up by 0.25% to 4.25%, your monthly mortgage payment would go up from £889 to £909 – £20, or the equivalent of an additional £240 a year.
If your rate went up by 0.50% to £4.50%, your monthly payments would go up by £40 to £929, or the annual equivalent of an extra £480.
According to Mark Carney, a base rate of 2.5% could be likely by early 2017. If your mortgage rate also went up by two percentage points to 6%, it would mean monthly payments of £1,051 – £162 extra per month compared to now, or a whopping annual bill that’s £1,944 higher than at present.
Unless, of course, you locked down your payments with a fixed rate deal in the meantime.
The cost of fixing
In June, Carney warned that interest rates could start to rise sooner than expected. Since then, ‘swap’ rates – which are the market rates on which mortgage pricing is based – have slowly risen.
Meanwhile, the cost of fixed rate mortgages, particularly the most popular two-year fixed deals, has been creeping up, but deals below 2% are still available if you have a hefty stake in your property.
For a 40% deposit, you can five-year fix for under 3% (2.94%) with HSBC or, if you want a two-year fix, West Brom Building Society is offering a rate of 1.58% until August 31, 2016.
For those with less equity in their property, fixed rate deals are more expensive.
For example, in the 90% loan-to-valuation bracket, Chelsea Building Society offers a 3.44% two-year fix. In the 80% bracket, Post Office offers a five-year fix at 3.45%.
Put down a 30% deposit and you can get a five-year fix at 3.19% with HSBC.
Dan Plant, our resident mortgage expert, commented: “A base rate rise is almost inevitable, either later this year or early in 2015. That’s why we’re seeing the first rumblings of an upward tick in mortgage rates.
“It’s still, early, though, so you’ve plenty of time to find a good fixed deal – if bill certainty is indeed what you’re after. But you need to start looking now or risk the cheapest offers disappearing. It’s not just a question of finding an attractive rate and taking the plunge – arrangement fees can typically be around £1,000 and could even reach towards £2,000. And remortgaging means unavoidable bills such as a survey.
“Fixing now at a higher rate than you’re already on is not guaranteed to be the cheapest option – it all depends on what happens to interest rates. But what is does give you is a guarantee of what you’ll pay over a set period – stick on a variable rate and your monthly bill could jump steeply if the Bank of England hiked base rates sharply.”
MoneySuperMarket recommends talking to independent broker London & Country: there’s no obligation to buy, and no fees to pay if you go on to arrange a mortgage through them.
You can reach them on 0800 073 1943 from a landline or 0333 123 1943 from a mobile.
You can check out our mortgage channel here.
Length of fix
David Hollingworth of London & Country says those interested in fixing their mortgage need to think ahead to when the fix ends: “We are seeing a lot of people going for fixes. How long to fix for depends on how long you are comfortable to fix for.
A two-year fix now will end in 2016, and the base rate could change dramatically before then if Mark Carney’s predictions of 2.5% by early 2017 are accurate. Hollingworth said: “People will be coming out into a higher rate environment.”
With the Bank of England’s Governor assuring gradual increases to interest rates, Hollingworth says it will be interesting to see if people prefer to take the “baby steps” of a standard variable mortgage to ease into higher payments.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.