In April, I took advantage of a variable discounted mortgage product with the expectation that interest rates would continue to decrease and I could secure a better deal. However, the current trend shows that rates are rising, leaving me in a bit of a bind. Currently, I have an 11-year mortgage with a balance of £111,000, while my property is valued at around £400,000. So, my question is: Should I hold out and hope that rates drop, or should I take the plunge and opt for a fixed rate in case rates continue to climb?
David Hollingworth, an expert mortgage broker, responds to this common dilemma. In the past, borrowers often opted for fixed rates due to the stability they provided, especially when interest rates were low and had limited potential to decrease further. At times, fixed rates even fell below variable rate options, making the decision a matter of how long to fix, rather than whether to fix.
With the recent increase in interest rates, borrowers face the age-old dilemma of choosing between fixed and variable rates. In a higher rate environment, borrowers must consider the direction in which interest rates may be headed. When fixed mortgage rates sharply rose following the mini budget, many borrowers gravitated towards variable deals. Despite expectations of further increases in the base rate, borrowers were put off by the rapid escalation in fixed rates. Consequently, many chose discounted or tracker mortgages without an Early Repayment Charge (ERC) as an alternative to fixed rates at their peak. This proved to be a wise move as fixed rates stabilized and even decreased earlier this year. However, higher inflation figures have once again driven fixed rates higher, causing more borrowers to seek the certainty of a fixed rate.
It’s important to understand the different types of variable mortgage deals available in the market. For example, Santander offers base rate trackers that directly follow the Bank of England base rate. These trackers offer clarity because they move in line with the base rate plus a specified margin. On the other hand, discounted variable rates refer to rates that are lower than the lender’s standard variable rate. The standard variable rate fluctuates with changes in interest rates, but the lender has control over these adjustments. Thus, if the base rate drops, the lender may reduce the SVR by a smaller amount or not at all. Conversely, they may decide not to increase the SVR. So far, the largest lenders have increased their rates in line with base rate movements.
It’s worth noting that both trackers and variable rates may include an ERC, although it’s more common to find deals that do not tie borrowers in, allowing them to switch if needed. Some lenders apply an ERC during a tracker rate but still enable borrowers to switch to one of their fixed rate deals without penalty. Although having the option to switch is helpful, timing it correctly presents the real challenge. Ultimately, no one can predict how interest rates will fluctuate, but the current market expects the base rate to potentially rise further as the Bank tries to control inflation. However, longer-term fixed rates still remain lower than shorter-term deals, indicating that rates are anticipated to ease over time. Recent increases in money market rates used to set fixed rate mortgage pricing suggest that there may be further fluctuations, but the exact outcomes remain uncertain.
Considering these factors, it’s prudent for you to assess your comfort level with riding out the current situation. Prepare yourself for potential payment increases by stress testing your budget with various increments of rate rise. This exercise will help determine how stretched your finances may become and whether you have enough flexibility to accommodate these increases with the hope that rates will eventually decrease. If you believe that these increases pose a risk to your monthly budget, locking into a fixed rate may be more appealing. While fixed rates are not as low as they were in previous years, they offer the certainty of a fixed payment amount for a set period of time, regardless of future interest rate fluctuations. Ultimately, it’s impossible to predict future outcomes, and your decision should be based on your personal attitude towards the risk of further rate increases and your ability to withstand them.
If you have any more mortgage-related queries, This Is Money’s mortgage expert David Hollingworth is here to help. As a broker at L&C Mortgages, one of the UK’s leading specialists, he has extensive knowledge in the field. Please feel free to email your questions to [email protected] with the subject line “Mortgage help”. Include as many details as possible, and David will do his best to respond in-depth in a future column. Please note that his responses do not constitute regulated financial advice, and he may not be able to answer every question or correspond privately with readers.
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