Although the bank base rate has remained at the same record low levels of 0.5% since March 2009, fixed rate mortgages are showing signs of rising in the early part of 2014. It appears that many borrowers are getting the message and are fearful of rate rises, with almost 90% of borrowers/remortgages at the end of 2013 opting for fixed rate mortgages.
The market for short term fixed rates over two years have remained competitive with rates hovering around 2%, but if interest rates are going to rise significantly in the near future, these are not the rates to go for. The reason for this is that not only are you going to be facing more costs to buy into a deal at the end of the two years, but also potentially interest rates could have at least doubled even for a further short term fixed or discounted rate.
I feel that if the rates are going to rise steeply, then the attention should shift to longer term fixed rates. The five year fixed rate is already popular, with the best rates having been well below 3% last year. However, as mentioned earlier, rates are now showing increases with it being difficult to find rates below 3%. Admittedly, it is very difficult for people to move into action when they have now had five years of very low rates, with many people paying variable rates that are below the 3% rates that I am referring to. Yet I now feel that people need to consider their position, as there are a couple of factors that I believe are going to have an adverse effect on mortgage rates right now. Firstly, the government’s £80 billion funding for lending scheme has come to an end for residential mortgages from January 2014 and secondly the Financial Conduct Authority is introducing a new mortgage regime in April 2014, that although is designed to protect the consumer, will, in my opinion, make mortgages more expensive.
As a result, a lot of the action with regards to mortgages has centred around the five year rates and as uncertainty raises it’s head, it is perhaps not surprising that lenders are starting to look even further ahead, with 10 year fixed rates starting to make a come back. The Bank of England, through one of their policy makers, have commented that the UK housing market will be less risky if more mortgages were fixed and fixed for longer. We can point to other countries such as the USA and France that embrace long term fixed rates, but as yet we have not followed that lead. So should we be rethinking our attitude to long term deals? Currently, the Woolwich are offering 10 year fixed rates as low as 3.89%, which is a very attractive long term fixed rate, but should we be rushing into these rates?
The good reasons for doing just that are because you are buying long term peace of mind, as the payment remains constant and also such a long deal is helpful for budgeting and financial planning. In addition, you will also be saving potentially five costs of remortgaging if you always opt for two year deals and finally, perhaps making significant savings on the rate if we are moving to an era of higher rates. Reasons for not opting for 10 year fixed rates are that early redemption charges can be harsh and there is a lack of flexibility with these plans. For example, if you inherited money and could pay the mortgage off, this could deter some people. The biggest turn off would be the fact that a premium on the rate is paid for long term security.
However after 5 years of very low rates, we must resist the temptation of forward planning with the same very low rates, and either budget for paying higher variable rates or consider paying a premium to guarantee safety and security through long term fixed rates.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages, general insurance and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
3rd March 2014
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