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Should I fix my mortgage rate?

I get this question a lot nowadays.

With all the current news about expected increases in Bank of England rate it is definitely the time to think about this quite carefully.

Mark Carney signals BOE preparing to raise interest rates

If you fix you pay high interest rate now. If you don’t you may end up paying a much higher interest rate in the future.

Nobody can say how high the interest rates my go but in all probability they are likely to raise slowly and not reach the rate seen before the grand recession for some time. I think the answer to this question has to be “it depends on your personal situation”. But we can and should do a rational analysis of the alternatives and than take a decision.

Case for not fixing

Nobody can predict the future movement in interest rates with any degree of certainty. Not you, not me, not the Bank of England and definitely not the broader market. Nevertheless it is  the market which prices and fixes interest rates based on its expectations. Remember that by fixing your rate you are transferring your risk to someone else and therefore, if the market perception is correct, than on average you would end up paying more than if you did not fix. The additional payment is to compensate someone for taking away the risk from you.

There are two things to consider though:

First of all it does happen sometime that although the market perception has moved on the banks have not adjusted their deals accordingly. So while market might expect a higher interest rate due to recent statement by Governor of Bank of England your local bank it may take a week or two to revised its rates upwards or withdraw fixed mortgage rate options.

The second thing is that we don’t live our life on average. For us the outcomes of a wrong decision can be scary. 

Not to mention the fact that the market is usually always wrong and many times it is wrong by quite a big margin. Lets have a look at Bank of England rates over last thirty years or so:

I would personally not give much credence to the interest rate before 1995 as the economy structure was much different than. Stripping out the data before this date we can see that highest rate was in 1998 at 7.5%. I don’t know about you but this is quite a high interest rate for me.

A question than arises whether the increase in BOE rate results in linear increase in bank landing rates.  After all when the BOE rate was 5% just before the crisis you could get 100% mortgage at 5.5% a spread of only 5.5%. Remember the average spread is 2% in general. Here is a graph which plots the BOE rate against mortgage rate: base-rates vs bank-rates-mortgage-rates-500x354

As we can see in this graph the 2% spread rate seems to hold broadly except for a small period in 2009 when the gap narrowed. That period before the grand recession seems to be a fluke rather than a norm.

The factors in making the decision

The four key factors to consider when taking a decision as to whether not to fix your mortgage rate in my opinion are: Your tolerance of risk; the mortgage options available to you now; the mortgage options likely to be available in future; and your plans with respect to property you own.

Lets explore each of these in some detail:

Mortgage options available to you now

Before you consider other factor you have to carefully consider what mortgage options you do have available considering your personal financial and credit situation. There are plethora  of websites where you can look at alternatives. A good place to start is Moneysavingexpert’s mortgage comparison table. 

Mortgage options available to you in the future

A number of things could happen in the future which might increase the mortgage options available to you. For example you might be able to save money such that in future you can get a mortgage with higher level of deposit. The impact could be quite substantial if you can pull together 25% deposit as compared to 10%. It may therefore be counter productive to fix now for five years at a 90% mortgage. You might also expect to improve your credit rating over time which might also help. As I mentioned in my recent blog post about inflation impact on house prices, over time, you would expect the house prices to increase in line with inflation which means that even with same level of borrowing you could get a mortgage with lower Loan-to-HousingValue ratio. Do not forget however that considering the recent large increases in house prices ( if you live in south England) and usual fixed mortgage period 5 years the impact of this is likely to be immaterial and could indeed be negative if house prices take a correction in short term.

Risk tolerance

What is your current life situation is quite relevant to your decision and probably the most important factor to consider. If you have a stable job in  a profession which is in demand. Say you also have a partner who has a stable income as well. And there is room in budget for doubling of your monthly installment than you could take more risk and be less inclined to fix your interest rates. Conversely if you are currently contracting or are in a single income family or have dependents than you probably already have a high degree of risk in your life.   You might want to consider fixing ASAP if possible.

Your plans with respect to the property you own

This one could be relevant if you plan to either sell or let out the property over next few years. Although you might want to check if the mortgage is portable which would allow you to take the mortgage with you to new property. Do check fine print carefully as you might only be allowed to port only if you take additional mortgage from the same bank which might unnecessarily tie your hands when better options are available.

Bottom-line

There is no easy answer to whether or not you should fix your mortgage interest rate.If you consider the factors mentions in this post you should be able to come to an answer for your own specific situation. All things considered you would on average pay a little bit more if you fix your mortgage rate  but in return you would get rid of the risk of much much higher payments in the future. Do you think there are some other factors which I have missed out above?

Weekly Personal Finance: News with Views

Want to keep up with what's important for your personal finances in 10 minutes? 6 articles selected from UK with context delivered in your inbox.

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Written by Rajkanwar batra