It was a sharp reminder to a generation of homeowners that low rates would not last forever when Bank of England governor Mark Carney announced in November that interest rates were to rise for the first time in a decade.
That reminder – and the announcement there will be two more rises by 2020 – led to a flurry of activity among mortgage holders, who moved to fix their rates and lock in their monthly repayments. The rising cost of household bills further added to demand for the security of fixed-rate mortgages.
“Borrowers have been fortunate to see low interest rates encasing the mortgage market over the past few years, so they may not be prepared for more than one rise to be priced in over the next year or so,” says Rachel Springall of financial data website Moneyfacts.
“This demand for fixed-rate mortgages is likely to grow as we face economic uncertainty and speculation of a rate rise as soon as May this year.”
So as the next rise nears, is it time to fix your mortgage?
Why fix?
Competitive rates, as well as the impending arrival of a rise, has led to a demand for fixed rates among homeowners who are changing their mortgages, says David Hollingworth from London & Country Mortgages.
Particularly popular are five-year deals, according to Jonathan Harris of mortgage broker Anderson Harris. “The attraction is they give protection from potential rises for the medium term, without locking the borrower in for too long,” he says.
There has also been an increase in the number of people locking in for 10 years.
David Blake from Which? Mortgage Advisers says: “Some 10-year products only have early repayment charges for five years, and so can provide flexibility for those who like the idea of fixing for as long as possible, but want some flexibility at the halfway point.”
What are the best deals?
Last year saw fixed-rate deals hit record lows. But since interest-rate rises are now certain since the Bank of England announcement, lenders have been increasing rates.
“The talk of an impending rise in the base rate has started to feed through to fixed rates,” says Hollingworth. “As market expectation of rising rates has pushed funding costs up for lenders, that is ultimately felt in mortgage rates, and there has been a flurry of product withdrawals and ... fixed deals generally being nudged up. Those changes will result in activity as homeowners look to grab a deal before they are withdrawn. Those that have so far failed to take advantage of the low deals on offer are also more likely to be provoked into action to avoid missing out and to protect against future rises.”
There are still competitive offers out there, however. Springhall says the lowest deal for a two-year fix is from Yorkshire building society at 1.24%, although the loan can only be up to 65% of the value of the property. Post Office Money offers 2.13% for two years where the loan is 90% of the value of the property.
At five years, Yorkshire building society offers 1.74%, although the loan again can only be up to 65% of the value of the property. HSBC gives 2.44% for five years where the loan is 90% of the value.
“In recent weeks, some lenders have increased their rates slightly, but others have dropped them in a battle to increase their share of the market. Overall, my advice to anyone looking at mortgages is to act quickly to avoid missing the best products,” says Blake.
So should you fix?
The first question is what your long-terms plans are. “If you are planning to move, or your circumstances may change in the short term, don’t go for a long-term fix. If you fix for longer than you are absolutely sure about, you will likely have to pay early repayment charges to get out of the mortgage during the fixed-rate period, which can be considerable,” says Harris.
With longer terms often seeming less attractive to borrowers, that has led to the rise in popularity of the five-year fix, says Hollingworth.
“Although fixes can be had for up to 10 years, the lock-in is often off-putting, and more tend to opt for the medium-term five-year fix,” he adds.
“Seven and 10-year deals could be worthwhile in the longer run, though, and suit those that don’t see any need to review their deal. For example, it could see out the remaining 10 years of their mortgage.”
