In the current mortgage market, fixed rate deals are a far more popular choice than variable rate deals.
It almost seems inevitable at the moment, that people will choose a fixed rate mortgage. They worry interest rates may rise in the future and they want certainty, so they have already made their mind up on a fixed rate before they come to see us. Something that isn’t so inevitable, is the choice of how long to fix for. It can seem an odd decision sometimes, when somebody feels so strongly about fixing the interest rate on their mortgage, but then chooses to do so for only a short length of time, such as two years. If security of payment is that high on the priority list, why isn’t the choice a longer term fixed rate such as five or ten years.
Maybe we need to change mindsets on how we look at the choices we have. Rather than asking the question, fixed or variable, for which there is only two answers, the question should be, how long do we want certainty. With this question, you can start to look at the options as a spectrum ranging from zero certainty with the variable rate deals, then 2 years fixed, then 3 years, then 5 years, up until 10 years. When you look at the choices available set out like this, you can see the two year fixed rate option is actually quite low down on this ‘interest rate certainty spectrum’. So actually if certainty is what you really want, then you need to be looking further down the spectrum towards the 5 year and 10 year options.
There are of course reasons not to fix for longer periods of time, such a possible future change in circumstances or the need to potentially move home in the future, so this needs to be thought of before tying yourself in for too long. Although with most mortgages, it is possible to port your loan to a new property without paying an early redemption charge, it can make it more difficult to do so because of any restrictions the lender has at that time.
Unfortunately though, one of the main reasons people do not choose to opt for a longer period of fixing, is because generally, the longer you fix for, the higher the interest rate. Too often it is borrowers who cannot afford to see interest rates go up, that are the most willing to take the risk of a variable rate or a shorter term fixed rate, so that they can save money in the short term. This is a temptation that needs to be steered clear of, because it is one of the biggest types of gamble you can take, and for the sake of saving a few quid here and there, isn’t worth the risk of losing your home if interest rates do rise significantly.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
7th May 2018