Fix or gamble: what to do with your mortgage, energy and savings deals

Is now the time to lock into a fixed deal on your savings or bills, or gamble by holding off?

With money particularly tight at the moment, it is more important than ever to think carefully about how to get the most from our money.

With some outgoings, we have little control ‒ there’s not much choice involved in your Council Tax bill, for example.

But with bills like your mortgage, we have some say over the deal we sign up for, and therefore what it’s likely to cost should we go for a fix over a variable rate.

The mortgage is just one example of this though; here are some of the big money decisions you need to make.

Fix or gamble: your mortgage 

One of the big decisions all homeowners face is how to handle the interest rate on their mortgage.

Going for a fixed rate offers some security ‒ you know that your interest rate won’t move for the term of your fixed period, and as a result you also have certainty over what your monthly repayment will be.

That’s obviously extremely useful when it comes to budgeting, but it also means you get some protection from Bank Base Rate increases. Given Base Rate has been increased 14 straight times, to its highest level in 15 years, that protection can prove invaluable.

However, that certainty comes at a premium ‒ the interest rate on a fixed rate will be higher than what you can get on a variable rate, at least initially.

As a result, you will enjoy smaller repayments, but with the potential downside of eventually having to pay more if and when Base Rate increases.

The right choice will vary based on you as an individual, as well as the general economic circumstances.

If you value knowing what you will pay each month then a fixed rate makes sense, while it will also be a good choice when it appears that Base Rate rises are in prospect.

However, if you want to pay as little as possible, are happy to take a bit of a risk, or you think that Base Rate will remain at its current level ‒ or even fall ‒ then a variable mortgage is worth considering.

It’s also important to bear in mind that variable mortgages come in different forms.

While some move directly in line with Base Rate, others are more at the whim of your lender so you could end up seeing your rate change, even if the Bank of England isn’t hiking Base Rate. 

The expectation in the financial markets is that there is at least one more Bank Base Rate rise on the horizon, though the pricing of mortgage deals is starting to drop.

Given this situation, while fixed rates are clearly going to appeal, it may be worth holding fire a little longer to see if rates do continue their downward trajectory.

Fix or gamble: your energy tariff

Historically a fixed energy tariff was a smart way to go about keeping your energy bills low.

These tariffs locked in how much you would pay for a set period, and worked out cheaper than the standard variable rate (SVR) tariffs that households are shunted onto at the end of that initial fixed period.

In fact, SVRs were such a rip-off that the energy price cap was introduced in order to stop suppliers milking us excessively. 

Things have changed somewhat over the last few years, to the point that very few suppliers currently offer fixed rates, with those that are on offer rarely representing much of a saving on the energy price cap.

That may not be the case for long, however. The price cap was set at £2,074 for typical households for the July to September period, with forecasts from Cornwall Insight suggesting it will drop to £1,860 for the final quarter this year.

What’s more, suppliers are starting to get a little braver in offering new fixed rate tariffs that are even cheaper.

Often these are limited to existing customers only ‒ Octopus Energy is offering one that works out about 6% cheaper than the energy price cap, while E.On Next has one that is around 2% cheaper, both of which can only be obtained if you’re already a customer.

It’s slim pickings on the general market though, meaning that many of us are better off watching and waiting. Once competition starts to return to something approaching normal, then we may start to see fixed tariffs once again delivering a tangible saving.

PROMOTION

Fix or gamble: your savings pot

Bank Base Rate has been repeatedly hiked over the last year or so, but it appears that there will be further increases in the months ahead. As a result, there is a certain appeal to opting for a variable rate deal on your savings.

After all, that way you will see the returns on your cash increase as Base Rate does.

By contrast, what looks like an appealing fixed rate today might start to look a bit mediocre a few months down the line if Base Rate is increased.

The trouble is that, as we have pointed out before on loveMONEY, we can’t really rely on savings providers to pass those increases on properly when it comes to easy access savings.

In some cases, providers require you to actively ask for your rate to be increased, while others simply launch new ‘issues’ of their savings accounts which offer a high rate, rather than actually increasing the rate for existing savers.

What’s more, the scale of any further increases to Base Rate is likely to be quite modest, suggesting that if there are going to be better rates on offer, they might not be all that much higher than what we have today.

Securing a fixed rate means giving up access to your cash for a set period, so whether it makes sense for you will not only come down to the rate on offer but also how likely you are to need access in the months ahead.

If anything, combining variable and fixed rates may be the way to go ‒ keeping some money in an easy access variable account for emergencies, and then locking other money up in short-term fixed-rate bonds.

Then you can move that money in bonds into longer-term, better-paying deals down the line once it no longer seems inevitable that Bank Base Rate will continue to rise.

Check out the best interest rates on offer today across all sorts of types of savings accounts.