With fixed-rate mortgage rates at their lowest in nearly a year and fears growing about a rise in interest rates, is it time to fix your mortgage?
Predicting what interest rates are going to do is a popular sport. A quick dig around turns up a wide range of forecasts. For example, Reuters says the base rate will be 2% by the end of 2011, Barclays Capital reckons it will be 3.5% and Capital Economics predicts the rate will stay at 0.5% as we head into 2012.
While it’s impossible to say for sure who’s right, it seems unlikely that interest rates are going to rise in the near future. While we may technically be out of recession, economic growth of 0.2% in the first quarter of this year does not signal a return to the kind of growth that would trigger rate rises. And, leaving aside the current pick up in inflation, the Bank of England is still more concerned about deflation. So expect to see a base rate that sticks at 0.5% for many months yet.
That means that for most borrowers it’s probably not time to fix your mortgage. If interest rates stay low, you’re better off sticking with a cheap tracker deal. Cheltenham & Gloucester, Nationwide and First Direct all offer tracker mortgages with a rate of 2.5%. If you are currently sitting on your mortgage provider’s standard variable rate (SVR), then switch to a tracker: tracker mortgages follow the base rate, but a provider can raise its standard variable rate regardless of what the base rate is doing. That’s why over the past 13 months many SVRs have been creeping up, despite a flat base rate.
However, a tracker mortgage may not always be the best choice. The low base rate is good news for your mortgage payments, but it means any savings you have are unlikely to be earning you any money. Just now, it’s unlikely your savings rate even matches inflation. So if you have a large amount of savings, an offset mortgage is a better bet.
These mortgages allow you to offset your savings against your mortgage to reduce the amount of debt you are paying interest on. For example, if you have a £150,000 mortgage, but put £50,000 of savings into the connected savings account, you’ll only pay interest on £100,000 of your mortgage. And you can still access your savings whenever you like. First Direct has a tracker offset mortgage with a rate of 2.59%. However, the minimum deposit is 35%.
Although interest rates probably won’t rise in the near future, if only a small rise would leave you unable to meet your mortgage payments then go for the peace of mind a fixed rate offers. And if you do decide to fix, go for a five-year deal. While there is disagreement over when interest rates will start to rise, most economists agree that rates will be significantly higher in two to three years’ time. So you don’t want to be coming off a fixed rate just as that happens. The Co-operative Bank has the best five-year fixed deal with a rate of 4.49%, although you will need to come up with a 25% deposit.