As any good cook will tell you, timing is everything. The same is true with fixed rate mortgages at the moment!
Imagine you want a mortgage that allows you to budget for the next few years. You might be unsure which way interest rates are heading and you don't like nasty suprises. It's important that you know how much your mortgage payments are. After chatting through your mortgage requirements with an adviser, you decide a fixed rate matches your needs.
You've decided to stretch yourself a bit to get a nicer home, maybe with an extra bedroom or a bit more space downstairs. You can see yourself staying there for at least 5 years.
If you want a fixed rate, how long should you fix for?
You will probably look at 2, 3 or 5 year fixed rates. You might be tempted to go for a shorter 2 year rate for two reasons...
The rate may be (but is not always) lower over a shorter period of time AND you might want to 'review' your mortgage again in 2 years time.
Of course, in times past, shopping around again for a mortgage every couple of years could prove lucrative. Beware, 2 year rates may lead to some very nasty suprises in 2 years time!
Consider what the Bank of England forecasts are for economic growth over the next couple of years. Billions upon billions of pounds, dollars, yen and euro's are being pumped into the global economy to fend off the recession by governments across the globe. Whilst we are all experiencing pain in the shorter term, in time economic growth will return.
As previously mentioned in our blog, it is our opinion that the Bank of England base rate will rise in the medium term. Just to repeat why we feel this...
Firstly, low rates have not helped savers who have withdrawn their savings from British banks to find a better rate of return elsewhere. This has left the banks with even less money to lend.
Secondly, the low exchange rate is leading to the price of imports increasing, which, in time will lead to higher prices in the shops (and higher inflation). This problem will be especially acute once the economy pulls away from recession.
The Bank of England will try to tackle these problems, when it is safe to do so, through increasing the bank base rate.
How will that effect you if you have chosen a 2 year fixed rate?
In our opinion; at the exact point a 2 year fixed rate comes to an end, interest rates could have already been increased to counter the threat of inflation and to halt the flow of savings out of the UK.
In two years time;
- How will you fair trying to renegiotiate a new interest rate at a time when interest rates could be increasing?
- Will the effects of the 'credit crunch' mean the mortgage market lacks competion at the point you are trying to find a new mortgage?
- What if property prices have fallen a little bit more over the course of 2009? If you started your fixed rate with say a 10% deposit, and your equity has been eroded by further falls in property prices, how likely is it that you will be able to find a new mortgage as your deposit has shrunk?
Very careful consideration needs to be given to these points before deciding the length of any fixed rate. None of us can be certain what is going to happen over the five years. Taking a shorter term rate exposes you to the risks that the next couple of years are likely to bring. Just as we are starting to think about our homes as somewhere we may have to live for a little longer than we would have done in the past, maybe now is the time to take the same view with our mortgage?
