How long should you fix your mortgage for?
Over the last few months, it’s not just mortgage interest rates that have dominated the headlines but also The Bank of England base rate, mainly due to the speed at which it has increased. At the beginning of 2022 rates were at an all-time low, as they have been for many years, and we have all become comfortable with low mortgage rates too. This low Bank of England base rate has not only influenced loans but also savings and pensions too. But now we find ourselves in a situation where the Bank of England base rate has had the biggest rise in the last 30 years, we’re left wondering what does this mean for our mortgages? And how long should we fix for?
The Bank of England base rate
Before we get into how long you should fix your mortgage for, let’s clear up a few points about some of the worrying headlines you may have read lately; “Bank of England warns mortgage defaults to rise in months ahead,” “Blame Bank of England for rising mortgage rates” and “Annual mortgage bills to rise by thousands”. Firstly, it’s important to note that mortgage lenders do not borrow money at the same rate as the Bank of England base rate. Mortgage lenders borrow money from other sources to lend out at a higher rate and therefore make a profit – these are called swap rates. In recent months, mortgage rates have been going up independently of the Bank of England – it doesn’t directly impact mortgage lenders as automatically as we’re perhaps led to believe.
Swap rates have been going up too, especially, as you may well remember during Lizz Truss’ mini budget. The economy was plunged into a short period of unrest, swap rates were raised almost immediately, and lenders withdrew their rates as they required time to calculate at what rate they would need to lend at. Many world factors can affect swap rates; war, price of oil, electricity, changes in prime minister. These factors can make it more expensive for mortgage lenders to get their money so therefore it’s more expensive to us as consumers.
What does this mean for my mortgage?
Then we ask; will rates begin to calm down and then reduce? If so, to what extent? Will this be a short-term problem? No mortgage adviser will be able to or should make future guarantees because of the very nature of what can affect interest rates. However, financial experts do believe that interest rates will begin to calm into 2023. For example, fixing a mortgage for 2 years is currently more expensive than fixing for 5. If lenders believed that rates would keep increasing, would they offer 5-year fixed rates for less than 2-year fixed rates? Is this a sign that rates will start to stabilise or even decrease? If you need a mortgage today, this will unfortunately be of little comfort to you, but you should aiming to do things well in advance of your mortgage end date to secure the very best rate possible is always wise.
One thing is for sure, it’s never been more important to seek expert mortgage advice. Mortgage advisers cannot predict the future of mortgage rates or the Bank of England base rate any more than anyone else, but they can tell you what is best for your individual financial circumstances. Any good mortgage adviser will continually monitor the situation daily and can accurately analyse changes and updates and what they mean for you, so they always have the most up to date information to advise you with. There has also never been a better time to get ahead – do your remortgage 6 months before your current rate ends. A new mortgage offer will last up to 6 months so this is the best way of safeguarding yourself against future rate increases.
Attitude to risk
I always explain to my clients that the way to decide how long to fix a mortgage for is a matter of considering your attitude to risk, which no one can decide for you. Would you feel safer knowing exactly what your monthly mortgage payment was going to be for the next 5 years, without any change or would you rather take a risk on a 2-year mortgage knowing you may potentially pay more or that you could save?
If you want a chat about your individual situation, there is never any obligation to do anything more. Get in touch with us on 0300 981300 or email us on firstname.lastname@example.org and we will be ready to help you with your next mortgage decision.