Should you opt for a five-year fixed rate, even if you are on a good mortgage rate now? Beckie Pepperrell, head of residential at Mortgages for Business, explains why she currently likes longer-term fixes
Back in 1990, mortgage interest rates peaked at an eye-watering 15.4%. Compare that with today’s rates, some as low as 1%, and it’s not difficult to appreciate that homeowners have had it pretty good over the last 10 years.
But, in the words of Bob Dylan, the times, they are a-changing. In November 2017, the base rate which is set by the Bank of England crept back up to 0.5%, from an all-time low of 0.25%. Whilst this might not be much of a climb, it does show that Brexit, a weak government and the uncertain economic climate are beginning to effect a change in the direction of interest rates generally.
No one knows if or when the base rate will rise again but a rise is definitely more clearly on the horizon that previously. And when base rate rises, so do mortgage rates – pretty much immediately.
But is it worth getting a five-year fixed rate now or should you wait a little longer? Only you can decide and that will depend upon your appetite for risk.
But consider this: Recently, there was a great five-year fixed rate available at 1.79% (3.27% APRC) to 60% loan-to-value (LTV) with a £999 fee. A mortgage on borrowing of £200k at this rate for the first five years will cost you £131 per month more than if you were on a low SVR tracker of say 0.5% above base rate so 1% current pay rate.
However, base rate only needs to creep up by 0.25% another three times to get to the same level as the five-year fixed rates and in my opinion, this will happen well within the next five years meaning you could end up paying more for your mortgage in the long run.
Further, we are already seeing some increases in mortgage pricing, particularly on five-year fixed rates which rely on other market forces for their pricing.
Never under-estimate peace of mind – I was on a low SVR tracker which I loved during the long period when base rate was 0.25%. However, when it climbed back to 0.5% I suddenly realised just how vulnerable I was – my monthly payments rose immediately.
So, I remortgaged onto a five-year fixed rate and now I’m happy. Yes, I am currently paying a little more each month but the amount doesn’t change which helps me budget and stops me worrying for the next five years!
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