To fix or not to fix?

The complicated economic situation in the UK leaves mortgage borrowers with some difficult choices to make about their next home loan product

Should you fix your mortgage interest rate, or go variable? For borrowers taking out a new mortgage, or remortgaging because their existing home loan deal is coming to an end, this is always a tricky decision. But in the current market, the choice looks particularly finely balanced.

It’s worth remembering how we got here. For more than 10 years following the global financial crisis, the Bank of England kept its base rate remarkably low in order to support financial stability and bolster the economy. It maintained that approach during the Covid-19 crisis to provide further support. Then, inflation began to climb sharply, and the Bank had to respond. Since December 2021, when it raised the base rate from 0.10% to 0.25%, 12 further increases have taken the rate to 4.5%.

The question is what happens next

The broad consensus among economists is that inflation will begin to fall during the second half of this year and into 2024. That would allow the Bank to reduce its base rate once again. However, the outlook is far from clear. Further rate rises may be required to attack inflation. And some economists expect inflation to remain higher for longer; in which case, base rate reductions may be further away.

This mixed picture has direct consequences for the mortgage market, where lenders set their interest rates with one eye on the future. Since the consensus is that base rates are likely to fall over the next year or so, tracker rate mortgages – which follow the base rate up and down automatically – currently cost a little more than fixed rates, which are set at a fixed rate for the term of the deal.

The gap widens over time. Two-year fixed-rate deals are currently marginally cheaper than variable-rate tracker mortgages. Five-year fixed-rate deals are cheaper than their two-year equivalents.

Mortgage borrowers therefore face a dilemma. Everyone taking out a mortgage today will pay more than they would have done two or three years ago. So, if you’re remortgaging, your new deal will almost certainly be more expensive. But should you go fixed or variable?

The case for a tracker deal is that while the Initial rate may be higher than a comparable fixed rate,, there is scope for base rates to come down to such an extent that would make them cheaper than today’s fixed options. Overall, that could mean you paying less over a two-year or five-year deal, even if your initial payments are higher.

The counter argument is that those economists who expect interest rates to stay higher for longer may be proved right. That could mean rates don’t come down quickly enough for a tracker deal to work out cheaper.

Equally, affordability is a crucial consideration. For borrowers on tight budgets, the higher initial rate of a tracker deal may be prohibitive, even if they expect those costs to fall over time. Today’s fixed rates are more affordable straight away. And they at least provide complete certainty about what you’ll be paying each month over the term of the deal.

Medical professionals thinking about this debate also need to think carefully about their career – and income – progression, particularly early on in their working lives. As you move towards workplace anniversaries that take you up the pay scale, you can be confident that your income will increase. This may help you with the calculations you need to make about affordability.

However, there may also be other complications to consider. One issue for those remortgaging, for example, is that house prices in some areas of the country have been falling in recent months. If your home is worth less than it was last time you took out a mortgage, your remortgage could be a higher percentage of the value of your home. Lenders charge more for higher loan-to-value deals, so this has the potential to increase your costs.

The bottom line is that everyone’s circumstances are different

There is no single right answer to the question of which mortgage deal is the best one right now. That will depend on a whole range of factors, many of which are individual to each borrower.

For this reason, it makes sense to take professional advice on arranging a mortgage for a property purchase, or when you’re remortgaging. A qualified expert will help you understand the decision much more clearly, work out the most sensible way forward, and identify the best mortgage deals for your situation.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Content correct at time of writing and is intended for general information only and should not be construed as advice.

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