With the Bank of England Base Rate at its highest in more than 14 years and interest rates fluctuating accordingly, homeowners may be questioning what type of mortgage deal may be more suitable amid continuous uncertainty. Express.co.uk spoke to experts to find out the pros and cons of each against the current, turbulent economic climate.
Mortgage interest rates can vary between variable rates, such as discounted and tracker rates, and fixed rates. But with increased uncertainty, deciding whether to fix a rate or opt for a variable is one of the key questions at present.
Fixed rate mortgages
Fixed rate mortgage deals are offered with different terms and for different time lengths, typically two, three and five years.
Mel Whiting, mortgage expert at Norton Finance told Express.co.uk: “When there’s volatility in the market, fixed rate mortgages tend to be popular because they offer homeowners security in terms of knowing how much they’re paying each month for a set amount of time, say two, three, or five years.”
This means, she added, that fixed rate mortgages “remove the risk” of the repayments increasing due to interest rate rises.
However, like with all deals, these can come with some cons. Paul Johnson, head of mortgages at St. James’s Place said: “Fixed rate deals are usually slightly higher than variable rate mortgages.”
He also said: “If interest rates fall, you won’t benefit.”
Ms Whitling also highlighted that if a person needs to sell or remortgage, whatever the reason, during the fixed period, they would incur and early repayment charge – or exit fee. She added: “These can be costly, often ranging from one to three percent.”
Standard Variable Rate (SRV) mortgages
Variable rates are set by the lender and tend to be significantly higher than fixed or tracker rates, but the terms are flexible to make up for the cost.
Webuyanyhouse’s Alex Goody explained that homeowners can also take advantage of falling rates.
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He said: “If interest rates drop, your variable rate mortgage rate will also drop. This means your monthly mortgage payment will decrease, allowing you to save money on interest payments and potentially pay off your loan faster.”
Ms Whitling added another upside of this type of product is that exit penalties are “minimal”, so there’s less need to worry about early repayment charges.
However, she noted: “There’s no protection against increases in rates for the term of the mortgage should the lender decide to increase the rate.”
Tracker mortgages move in line with Bank of England Base Rates. According to Mr Goody, one key pro for this type of mortgage is transparency.
He explained: “Because tracker mortgages are linked to an external financial index, the interest rate adjustments are often more transparent and predictable than other variable rate mortgages.”
However, he noted: “One of the biggest risks of tracker mortgages is that the interest rate can increase over time. This means your monthly mortgage payment will increase, potentially making it more difficult to afford.”
Mr Goody also added that tracker mortgages may be less widely available than other mortgage types, and may require a larger deposit or higher credit score.
Current market forecast
Express.co.uk also asked the analysts to compare the different mortgage types against today’s backdrop of fluctuations and uncertainty.
Ms Whitling said: “Our current outlook, and that of most of our industry colleagues, is that Base Rates are likely to remain reasonably stable. The sentiment is that rates are liable to rise slightly, but the highest expected point is likely to be 4.5 percent rather than the six percent predicted after the mini-budget.”
She continued: “While this is likely to mean further interest rate rises, lenders seem more confident, and we have started to see mortgage rates reduce slightly. Fixed rates are still more attractive to most borrowers because they offer security during what’s still a fairly uncertain period.”
Ms Whitling said the market is seeing an increase in take-up of two and three-year fixed rates, whereas when rates began to rise, borrowers were taking longer fixed rates of five, seven and ten years.
But in terms of monthly repayments, Ms Whitling said: “In today’s market the difference is minimal between variable, trackers and fixed rates, so unless you’re borrowing a substantial amount, the difference is negligible at the moment.”
Tim Leonard, personal finance expert at NerdWallet, weighed in: “At the minute, interest rates on fixed rate mortgages are higher than we’ve generally been used to since the 2008 financial crisis, but have also been falling steadily in recent months. Meanwhile, the ten consecutive rises in the Bank of England Base Rate mean the rates on variable mortgages have been regularly increasing over the past year too.
“If you think the Bank of England is unlikely to raise the Base Rate much further – a policy it’s pursued to try to bring inflation under control – or even think rate reductions might be coming in the not-too-distant future, you could potentially consider a variable rate mortgage.”
Mr Goody said that with many analysts predicting the Base Rate to start falling in the latter part of this year, those with tracker mortgages would see an “instant fall” in their repayments.
However, the Base Rate fall is not guaranteed, as Mr Leonard noted: “The crucial part here, however, is that your finances would need to be able to cope with a rise in your monthly repayments should the Base Rate continue its upwards path. And looking ahead, no one can accurately predict what the Bank of England will do next.”
For those with no financial leeway, Mr Leonard continued: “A fixed rate mortgage gives you certainty and peace of mind, though you might find yourself looking on enviously if you fix in and mortgage rates start to fall.”
Mr Johnson said that fixed rates have largely dropped below four percent, which means their popularity has returned. However, he noted: “You must consider your own circumstances to pick the product that is best for you. It is worth discussing the options in more detail with your mortgage adviser.”
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