Now is the time to get fixed mortgage deals

Get a fixed mortgage deal now or you'll regret it later...
There is a certain split among borrowers looking at new mortgage deals at the moment. Plenty are attracted by the cheapness of variable deals, but there are also plenty of reasons to fix your mortgage now.
Today, I don't just want to look at short-term fixed rate deals - it's time to consider fixing your mortgage rate for a decade.
'Wait and pounce' argument doesn't hold up
A leading argument for sticking with your cheap variable rates now is that you should wait for rates to turn upwards then fix before they've climbed far. However, most people probably won't 'get in' quickly enough to do this.
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See the guideIt's like stock-market investing: not everyone can buy at the bottom and most people miss it by a long way. With fixed mortgages, banks lend a pre-determined amount with each issue. If a demand rush swallows that in days, it won't be priced so cheaply next time.
What's more, lenders pre-empt the rush and can price in more margin.
The bottom line is, by the time the ship's tooted 'all aboard', it may already be miles from the shoreline. And that's why playing the waiting game is dangerous. Don't underestimate the speed at which expensive deals can replace cheaper ones when half the country wants in simultaneously.
The long-term average 'best' mortgage rate
My research indicates the absolute best mortgage rates for most of the past decade have been very close to the base rate, and that over the past 35 years the average base rate was around 8%. Over the past 15 years the average has been about 5%.
This means that if we average around 5% over the next ten years we will have done well in a historical context. To that end, it's worth comparing staying flexible against ten-year fixes.
What if you stay flexible?
Let's assume you're paying 3.5% in an SVR or short-term mortgage and that rates remain low for the next three years – just for my point's sake. (In reality, professional and amateur forecasting alike is consistently inaccurate, even when there's consensus.) You remortgage as rates then sprint to 6.5% for three years, and then remortgage again for another four years when they've fallen a little.
It'd be more bumpy than that, but you get the gist. Over ten years you've paid an average 5%:
A £125,000 property, re-mortgaging twice in 10 years
Mortgage rate and period |
Monthly payments |
First three years at 3.5% |
£725 |
Next three at 6.5% |
£900 |
Next four at 5% |
£824 |
Average interest over 10 years: 5% |
Average monthly repayments over 10 years: £830 |
Rounding applies.
I've deliberately made that example conservative:
- I've used the average rate for the past 15 years, which is just 5%; if rates revert to the longer-term average of 35 years it'll be 8%.
- A 6.5% peak isn't high by any standards. It could easily get higher (before you're able to catch the ship).
- I've excluded arrangement fees, but there'd be two such payments.
- I've assumed you've managed to get the very best deals each time you remortgage.
- I've made the big assumption that, when rates rise, the 'spread' between the base rate and the best available mortgage rates will swiftly narrow again to virtually zero. Currently, the very best deal is around 1.85%, whereas the base rate is 1.35 percentage points lower at 0.5%. If the spread doesn't narrow as I've assumed then it'll cost more.
That's an example of what might happen if you choose today to remain flexible and the next ten years are 'average'.
Long-term fixed-deal comparison
Now I'll compare this with long-term fixed deals. In this environment, huge numbers of people shouldn't fix for just five years. That's too short (although in certain individual circumstances it'll make sense).
At present, I can find no fixed deals lasting longer than ten years when looking for mortgages with a 75% loan-to-value (LTV).
The best ten-year deals are currently very close to the long-term average, with Britannia and the Co-op under 5.3%. Here's how they compare with my previous example:
Mortgage details |
Monthly payments |
Mortgage outstanding at end |
Total interest and capital repayments |
From previous example |
Average £830pm (£725-£900.) |
£77,700 |
£98,200 |
10-year fixed deal at 5.3% |
£845pm |
£78,700 |
£101,500 |
Difference |
£15pm |
£1,000 |
£3,300 |
This shows that if you fix now at 5.3% you'd pay a bit more than in my extremely conservative first example where you've remained flexible. The trade-off is your repayments are certain, and compare well to the long-term average, very best mortgage rates.
Who's average?
I've made assumptions and used averages above, basing it on a £125,000, 20-year remortgage, a 25% deposit, assumed you're a 'good' customer, and that you're currently paying a 3.5% SVR.
Millions are paying in this region, but millions of others aren't. It also assumes that it's right for your personal circumstances to tie yourself into such a long deal. For many it won't be.
What have we learned?
This exercise won't tell you your best mortgage, as our circumstances are individual. You'll need a broker for that. This exercise is meant to make you think longer term and to plan ahead.
Arrange a mortgage over the internet.
The best reason to fix is certainty of payments, as opposed to hoping to pay less. I would add that fixing long term now gives you certainty that you'll be paying a good rate by historical standards over the period.
And here's something to debate below: if you think we're pretty much near the bottom as far as rates are concerned, what better time is there to fix than now?
- Watch this video: Sort out your mortgage online!
Epilogue!
I can't leave without reminding you of a good alternative to fixing: overpaying. We've written about this many times before. You'll still need to ensure that you can meet payments when rates rise, which they will, and quite possibly by a lot.
Think long term. Plan for eventual higher rates. Don't think it's easy to catch the ship before it sails.
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Comments
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Interesting article, and well done Neil for replying as much as you have done
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For goodness sake....avoid ANYTHING to do with Carrington Carr Home Finance. My partner used Martins Money Tips to re-mortgage to try to reduce our monthly payments. We received a call from a "broker" (no name or I.D. given at the time, that soemone will call Before we knew it, our current loan of about 80k rose to 90k (Yeah OK we wanted some cash to pay off our credit cards) but the brokers fee was an astonishing 2.5k!! Google Carrington Carr guardian to read the newspaper report about the 2.7% fee they charge, and decide for yourselves.
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No one knows for sure what will happen to interest rates for sure. Normal economics has been replaced by some very dodgy practices including quantitative easing and interest rates that rob savers. If we do get back to normal economics and banks have to compete for deposits from savers rates will go up. They are great now if you have a tracker mortgage; but if rates rise you would be better as Neil has said with a fixed rate. So you can save in the short term and pay off as much of your mortgage as you can; that is a good idea. If you are in for the long term expect high interest rates and seriously consider a fixed rate. It all depends upon your individual circumstances. My guess is economic policy will change very quickly right after the 4th of May for some strange reason I have this premonition...
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24 March 2010