Should you fix your mortgage for two, five or even ten years? Homeowners nearing the end of fixed rate deals are urged to lock in soon
- BoE boss Bailey has warned that higher inflation may mean rates need to rise
- Banks have plenty of cash to lend but rate expectations may bump up costs
- Homeowners with fixed rate deals running out should look at rates now
- How much would a new mortgage cost you? Check with our mortgage finder
Homeowners who are coming to the end of a mortgage deal are being urged to protect their finances by locking into a new fixed-rate loan.
A tsunami of higher energy and food bills, plus inflation heading towards four per cent, means key household bills are on the increase.
And with the Governor of the Bank of England, Andrew Bailey, warning that interest rates will be pushed up if higher inflation becomes persistent, mortgages are also likely to get more expensive. Bailey has not ruled out a rate rise before the end of the year.
David Hollingworth, mortgage expert at broker L&C, says talk of the need for interest rates to rise to curb inflation means now could be the right time to lock into a loan that will provide homeowners with payment certainty.
Increase: A tsunami of higher energy and food bills, plus inflation heading towards four per cent, means key household bills are on the increase
He adds: ‘Being able to lock down the cost of what is typically the single biggest household outgoing, at a time when other costs are climbing, will help build resilience into homeowners’ monthly budgeting.’
Although banks and building societies have no shortage of funds to lend to borrowers – a result of record amounts of money being squirrelled away in savings accounts – Hollingworth believes it is only a matter of time before mortgage prices start rising.
‘The more the markets expect a rate rise, the more likely it will feed into higher funding costs for lenders,’ he says.
‘Lenders have been competing hard to make rates stand out, so profit margins have been cut to the bone.’
For most homeowners coming to the end of a current deal, a fixed-rate loan is the soundest option. As Hollingworth says, it offers payment certainty as well as protection against rising interest rates which a standard variable rate, discounted rate or a tracker do not.
Nicholas Mendes, an adviser at mortgage broker John Charcol, says borrowers with less than six months remaining on their existing loan deal should be acting now to secure a new one.
‘You can fix a new deal six months in advance with most lenders,’ he says. ‘If rates on fixed rate loans were then to come down even more in the meantime, you could switch to a lower rate with the lender before the new deal kicks in. It’s a win-win.’
Should you fix for two or five years?
For most borrowers, the key issue is how long to fix for.
A short two-year fixed-rate loan gives a borrower greater flexibility than a longer term fix. It means they could build up equity in their home – maybe helped by mortgage overpayments – so that at the end of the deal, they are then in a better position to secure a keener rate. The lower the size of a loan is relative to a home’s value, the better the rate that a lender will offer.
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Two-year fixed-rate deals for borrowers with a loan representing less than 60 per cent of their home’s value, are available from Platform – part of Co-operative Bank – at 0.79 per cent, subject to an arrangement fee of £1,499. Santander’s equivalent rate is a tad higher at 0.84 per cent, but the fee is much lower at £749.
For a £170,000 repayment loan with 20 years remaining, this would result in monthly mortgage payments of £770.
Yet, brokers say most homeowners are opting for five-year fixed rate loans. ‘They offer longer term payment stability,’ says Mendes.
This benefit does come at a small price, however, with the best five-year loans more expensive than their shorter counterparts. For example, the best five-year fix for someone with a minimum of 40 per cent equity in their home is priced at 0.94 per cent.
Although some borrowers will be locked into existing loans by onerous early repayment charges, they can still take action to reduce the size of their mortgage debt. Most lenders will now allow fee-free annual overpayments of up to 10 per cent of the loan value.
Hollingworth says overpayments only make sense if a homeowner does not have other more expensive debt they should be repaying first – for example, an outstanding credit card balance.
Ten-year fixes under 2% – but watch the exit fees
Many lenders now offer borrowers the opportunity to fix their mortgage rate for the next ten years.
Such loans have most appeal among homeowners who have no plans to move home in the foreseeable future.
This is because onerous early repayment charges will be levied if a homeowner needs to break the deal – maybe because they want to move home.
‘Such early repayment charges can often amount to thousands of pounds,’ warns David Hollingworth at mortgage broker L&C, ‘so only take out a ten-year fix if it dovetails with your needs and future plans.’
Virgin Money provides one of the best ten-year fixed-rate loans at 1.95 per cent on a home where there is a minimum 35 per cent equity.
On a £170,000 repayment loan over 20 years, this would cost £856 a month. But early repayment charges apply throughout, starting at eight per cent (of the loan) in the early years – and then falling in steps to one per cent. So, some one redeeming in year one would face a charge of £13,600.
TSB’s approach to ten-year fixed-rate loans is more flexible. On loans to value of up to 60 per cent, its mortgage rate is 2.39 per cent, but early repayment charges only apply in the first five years.
‘This loan gives a borrower the flexibility to continue with the rate or not after five years,’ says Hollingworth. ‘But the trade-off is that it isn’t the lowest ten-year rate.’
Brokers include John Charcol – charcol.co.uk – and This is Money’s mortgage service run by L&C.