Is now the time to opt for 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.
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.
Given the market is pricing in further increases to Bank Base Rate, with inflation remaining stubbornly high, the appeal of a fixed rate is pretty strong at the moment.
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 virtually no suppliers even offer fixed rates, and certainly not any that represent a saving on what you will pay on a tariff covered by the Energy Price Guarantee.
What’s more, it would appear that the energy price cap is due to be dropped substantially next week to around £2,000, which would work out at a saving of about £500 a year for the typical household.
Right now we all have little choice but to make do on a variable deal on our energy, though it seems likely that the months ahead will see the return of fixed tariffs to the market.
It would make sense to adopt a wait-and-see approach before signing up though ‒ it’s only once competition returns to something approaching normal that these fixed tariffs will likely deliver a tangible saving.
Fix or gamble: your savings pot
With Bank Base Rate expected to be increased further in the months ahead, then 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 BaseRate 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.
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.
More on loveMONEY.com:
The top bank accounts for earning interest
Things you should never pay full price for