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Time to lock into a cheap fixed mortgage deal?

As soon as interest rates dropped to a record low in March 2020, mortgage costs plummeted, too. 

But while lenders have offered some of the cheapest deals in history in the past year, fears of inflation on the horizon means rates could soon start to rise. 

‘Some economists are concerned that the easing of lockdown restrictions and an increase in consumer spending will cause inflation to rise quickly,’ says Will Rhind, mortgage expert at online broker Habito. 

What will you do? While lenders have offered some of the cheapest deals in history in the past year, fears of inflation on the horizon means rates could soon start to rise

‘In the past, governments have controlled inflation through rising interest rates, so if inflation does go up over the summer, we may see rates rise in response.’ 

So, if you want to guarantee that your mortgage repayments won’t increase, too, there may never be a better time to lock into a fixed deal. 

Mortgage deals are either offered on a fixed-rate basis, meaning the interest rate is set for a specified time period (for example, two or five years). Or you can get a tracker or variable mortgage, where homeowners repay their loan with interest fluctuating in line with the Bank of England’s base rate. 

Once either type of deal lapses, borrowers are usually switched to costly standard variable rates that also change along with base rate. 

Historically, more buyers have gambled on variable deals as they could save money if rates dropped. 

But fixed rates have become increasingly popular since the financial crisis in 2007-08. More than 93 per cent of deals taken out in 2017 were on a fixed-rate basis, compared with 65 per cent in 2006, according to the Financial Conduct Authority.

Previously, fixed-rate mortgages tended to be more expensive, as borrowers paid a premium for the peace of mind they provided. But with the base rate at a historic low of 0.1 per cent, there is no longer much price difference between variable and fixed rates. 

The typical tracker mortgage rate in May was 2.31 per cent, compared with 2.57 per cent for a usual two-year fixed rate, according to finance analysts Moneyfacts. 

It means that if you buy a £250,000 home with a 10 per cent deposit and pay off your mortgage over 20 years, your monthly repayments will be £1,200 on the average two-year fixed rate deal or £1,172 with a two-year tracker — a difference of £28 per month or £336 over a year. 

‘It might be worth paying those few extra pounds to make sure you aren’t hit by any price increases if rates do rise,’ says analyst Sarah Coles, of financial experts Hargreaves Lansdown. 

‘Mortgage rates are historically low at the moment, so it’s a really attractive time to fix — and for a lot of people it makes sense to have that peace of mind.’ 

But bear in mind that rates for some first-time buyers with small deposits have actually crept up over the past year, as lenders have looked to reduce the amount of risk they take on. David Hollingworth, of broker London and Country, says he has seen a rise in demand for five-year fixed deals recently. 

‘With all the uncertainty we have been through, with both Brexit and Covid, most people feel that the five-year term means at least they know where they stand on their mortgage,’ he says. 

So, what type of fixed-rate deal could be the right fit for you? A mid-term fix of up to five years works best for people who know they want to stay in their home for a few years — but the best rates are reserved for those with bigger deposits. For remortgagers with at least a 40 per cent deposit, rates for a two-year fix start as low as 0.99pc with TSB, while those with a 20 per cent deposit can get 1.79 per cent from Marsden or Furness building societies. 

Halifax offers buyers with a 40 per cent deposit a three-year fixed rate of 1.20 per cent, while those with a 20 per cent deposit can get 1.99 per cent through Leeds Building Society. 

And over five years, the best rates for buyers with 40 per cent deposits include NatWest, which offers 1.17 per cent in you use a broker, while those with 20 per cent deposits can get 2.08 per cent with Yorkshire Bank or 2.13 per cent with Leeds Building Society. 

If you are confident your circumstances will not change, you could avoid remortgaging fees by fixing your rate for a decade or more. 

This option might benefit couples with a secure retirement income or self-employed homeowners who want to avoid the administrative burden of providing two years’ accounts every time they remortgage. 

Virgin Money offers 1.95 per cent fixed until 2031 for borrowers with a 35 per cent deposit, while Barclays offers a ten-year fixed rate of 1.99 per cent — but you will need a 40 per cent deposit to qualify. 

Remortgagers can fix for 15 years with Virgin Money at 2.55p per cent if they are borrowing 65 per cent or less of the total value of their property. 

Long-term deals could save you thousands over the years if interest rates go up, but the penalty fees for leaving or paying a loan off early can be as high as 8 per cent of the remaining balance (that’s £16,000 on a £200,000 mortgage). You can often transfer the deal if you move home, but you will have to prove you still meet the affordability criteria. 

If your circumstances change, such as you lose your job or have a child, you may no longer qualify. 

And if you have a financial windfall, such as inheritance, be aware that you may not be able to use it to pay off your mortgage without incurring fees unless your deal allows overpayments. 

First-time buyers or those with a small deposit of 10 per cent or less may be better off fixing for just a short term as rates for these buyers are relatively high, advises Mr Hollingworth. 

‘Once people start making repayments and as house prices rise, these borrowers will own more equity in their properties so could qualify for cheaper deals,’ he adds.

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