With lots of talk about possible interest rate rises, now more than ever seems a good time to consider taking out a fixed rate mortgage.
There are millions of people in the UK who are currently on variable rate mortgages, who shouldn’t be, given their circumstances. Sometimes we can become quite irrational in our thoughts, and although when it comes to our money and investments, we may consider ourselves to be totally risk adverse and prefer to keep our money in a bank account or under the mattress, than to invest into stocks and shares. At the same time we are happy to take on the risk of having a variable rate mortgage. It can make you ask the question, why do we feel worried about losing some of our savings, but not worried about the prospect of losing all our disposable income and even possibly our home? Maybe it’s acceptable if you have two strong incomes in the household and a lot of money left over each month, so you can afford to feel the effect of interest rate rises. If money is already looking tight, you should consider paying a little bit more each month now rather than run the risk of having to pay a lot more later.
If you are on a variable rate mortgage, it is wise to stress test your finances against possible interest rate rises. Find out how much your mortgage would go up if interest rates rose by 1%, 3% and 5%, could you make lifestyle changes so that you could continue making mortgage payments? Even if you can afford to see interest rates go up by 5%, they could go up further, there’s no limit on how far they could go. There have been times when people were paying interest rates in the high teens, and it’s not impossible that one day that could return.
If you are on the fence about opting for a fixed rate mortgage, there are a couple of half-way houses which could be more attractive to you. Some lenders will allow you to take out a mortgage with part of the mortgage on one rate and part on another. So, if you borrowed £100,000 you could risk having £50,000 on the lower variable rate and £50,000 on the higher fixed rate. You would still be taking the risk that if rates were to rise, your monthly payment would go up, but you would only feel it half as much as you would have if you were to borrow all of the money on a variable rate.
The other half-way house option is to apply for a capped rate mortgage. This is a variable rate mortgage initially, but it can only rise to a certain level, at which it cannot exceed. The Coventry Building Society are currently offering a deal at a rate of 2.65% which follows the Bank of England base rate. This is capped at 3.89%. That would mean that if interest rates went up by 1%, your payment would go up 1%. If it went up by 1.25% or more, you would only ever feel the effect of a 1.24% rise.
There are a range of fixed rate, variable rate and capped rate deals available on the market, and it is best to contact an Independent Financial Advisor who can search the whole market to find the deal which suits your needs. If you are unsure of the options you have, it is worth contacting an Independent Financial Adviser who specialises in mortgages to provide you with impartial advice on what is right for you. Kieron Bassett Financial Services has two Independent Financial Advisers. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde CertPFS
21st February 2011
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