Should you fix your mortgage rate?


Interest rates are low, and the shape Brexit will take is still largely unknown, especially when you consider the impact it could have in the long term. However, it’s anticipated that interest rates will start to rise in the near future. It could mean repayments on debts will being to creep up soon.

As your mortgage is likely to be the largest debt you have, rising interest rates could have a significant impact on your monthly outgoings. Interest rates have remained low since the financial crisis, even following two recent rises of 0.25% each to the Bank of England (BoE) base rate. The governor of BoE has indicated that as the economy improves, additional rises are likely to be around the corner.

If you’re worried about potential interest rate hikes affecting your mortgage payments, switching to a fixed rate deal could give you peace of mind.

The level of interest paid on a fixed rate mortgage is, as the name suggests, fixed for a defined period of time. A fixed deal often lasts for two, three, five or ten years. The initial interest rate on a fixed mortgage product is typically slightly higher than alternatives, but you don’t have to worry about it unexpectedly rising during the period defined in the chosen product.

This compares to both variable and tracker mortgages, which will rise and fall in line with either your lender’s interest rate or that set by the BoE. As a result, should interest rates rise, so too would your monthly repayments.

How would rising interest rates have an impact?

How much your monthly payments would increase by will depend on a range of factors, including the amount of outstanding debt and the mortgage period.

For example: If your current outstanding mortgage is £150,000 being repaid over a 20-year period with an interest rate of 2.5%, your monthly repayment would be £795. A rise of 1% would increase this to £870. If interest rates were to reach 5%, you’d be paying out £990 each month.

While a 1% rise doesn’t seem like much, in this example it would mean paying out an additional £75 every month. If your budget is already stretched, it could put you under financial pressure. With this and potential rises on the horizon, is now the right time to consider fixing your mortgage rate?

It is important to note that while rises are expected, they are likely to be gradual and over an extended period of time. The two most recent rises, for example, in November 2017 and August 2018 were both 0.25%.

The pros of a fixed rate mortgage

Peace of mind: The uncertainty around whether interest rates will rise in the future can put you under pressure. A fixed rate mortgage can give you confidence in your finances and remove concerns. If you prefer to know exactly how much you’ll need to pay out each month, a fixed rate mortgage may be the best option for you.

Protected from potential rises: While there’s no guarantee that interest rates will rise, it’s anticipated that increases will happen. Fixing your mortgage now allows you to take advantage of the lower rates for a defined period of time. Over the length of your mortgage product, it could mean saving hundreds of pounds.

The cons of a fixed rate mortgage

Higher initial interest rates: When you fix your mortgage rate, you do pay a premium for the security it provides. As a result, the rate and monthly payments are likely to be higher, at least to begin with. Typically, the longer you want to fix your rate for, the higher the interest rate will be.

Less flexibility: Only a few fixed rate mortgages will allow you to move home and you could face additional charges should you want to overpay. If flexibility is a priority for you when picking a mortgage product, a variable or tracker mortgage may suit your lifestyle more. It’s important here to carefully check the terms of any mortgage contract before signing to understand restrictions and potential fees you may face in the future.

Interest rates may not rise: As we’ve stated above, there’s no guarantee that interest rates will start to creep up. If they remain the same, or even decrease, a fixed rate mortgage may cost more over the term of your mortgage. While signs point to interest rates increasing, it’s important to keep in mind that this may not happen when making a decision.

If you’re thinking about fixing your mortgage, remember to check any associated costs when searching for a deal, including exit fees if your current product hasn’t finished yet.

If you’d like to discuss your mortgage needs and wider financial security, please contact us.

Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.

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      Spinningfields Lifetime Partners Limited is an appointed representative of Quilter Financial Services Ltd and Quilter Mortgage Planning Ltd, which are authorised and regulated by the Financial Conduct Authority. Spinningfields Lifetime Partners Ltd is registered in England and Wales. Registered Number 11412273, Directors: J Butler, M Headen, P Merrigan, U Ozturk. Registered Office: 12-14 Upper Marlborough Road, St Albans, Herts, AL1 3UR.