Protect yourself from mortgage rate hikes

Why locking in for the long term is the smart move in the current market.

If you have watched the TV, read a newspaper or listened to a radio in the last month a large proportion of what you will have ingested will have probably been to do with (a) the housing market and whether it's really improving or we are seeing a 'dead cat bounce'; and (b) what's going to happen to interest rates and what mortgage borrowers should do.

As for the first of these British obsessions, I am firmly in the dead cat bounce camp, believing that any green shoots will wither away as quickly as they came. I think we are close to the bottom, but not there yet.

What about mortgage rates?

Here I face a problem, for while I am happy to wait to buy a property, I fear that with every week that passes the chances of me bagging a cheap mortgage deal are diminishing. I think mortgage rates will increase -- fixed and variable deals -- and I think now is a great time to lock into a deal for the longer-term.

Five-year fixed rates are the product of choice for mortgage pundits on screen, in print and over the airwaves. It seems that no mortgage expert worth their salt would recommend anything other than a long-term fixed rate in the current environment.  A cheap rate, long-term security and protection against potentially rocketing interest rates -- what more could you want?

Let's hear it for five-year fixes!

I, for one, think that the experts are right to promote five-year fixed rates. There are some stonking deals out there. For a modest premium on short-term fixed rates they give you bags of payment security.

If you are a first-time buyer and need some stability to help with budgeting or if, like me, you have a fluctuating income and really can't cope with fluctuating outgoings, a five-year fix could suit you down to the ground. Equally, if you have stretched yourself to borrow and simply cannot afford an increase in your monthly repayments at the moment consider the safety of a long-term fixed rate.

Then you can you can forget about interest rate movements for five whole years. And, quite frankly, that is very appealing. Who wants to be thinking about their mortgage all the time?

Another big bonus is that you pay your arrangement fee now and that's it for five years. If you flit from one two-year fixed rate to another you'll be stumping up for arrangement fees at the end of year two and the end of year four -- as well as legal and valuation fees -- meaning the cost could easily total £1,000 each time you remortgage.

The case against long-term fixed rates

However, while five-year fixed rates are attractive, and are historically very cheap, they are not currently cheaper than short-term fixed rates and variable deals (including trackers). And if, over the next five years, rates remain as low they are now, those who have locked in could end up paying far more overall.

For example, the cheapest five-year fixed rate is from HSBC at 4.39% (up to 75% LTV with a fee of £999). On a £150,000 repayment mortgage your monthly repayments would be £824.

By taking a cheap two-year fixed rate on the same terms, such as Mansfield Building Society's 3.39% deal, your monthly repayments would be £742, saving you £82 a month. So, for the first two years at least, the two-year deal would see you £1,968 better off. Not to be sniffed at.

The same principle is true if you take a tracker mortgage, which are priced even lower, with deals at less than 3%.

So why do I prefer five-year fixed rates? Because interest rates are currently at a record low, and once the economy starts to recover, it's likely rates will rise significantly. So if the recovery happens over the next two to three years, the five-year fix will almost certainly work out better.

Then again, nobody knows what will happen.

Unless you can comfortably afford to be wrong, it's not a great idea to base your mortgage choice on rates remaining low. After all, the Base Rate is at an all-time low of 0.5%.

One other thing to consider about five-year deals is that they usually come with hefty early repayment charges (ERCs) if you try to break out of the deal early (either to get a different mortgage or because you need to sell your home). Make sure your mortgage is portable in case you move house in the next five years, or you will have to pay these ERCs.

You snooze, you lose

If you do decide you want a five-year fixed rate - don't hang around. Fixed rates in general are increasing and are expected to rise even further. In the last month, the average two-year fixed rate has risen by 0.03% to 4.64%, and the average five-year deal by 0.01% to 5.55%, according to lovemoney.com partner Moneyfacts.

Some tasty deals have already gone and others are not expected to hang around for long. The Post Office's market-leading five-year fixed rate of 4.15% up to 75% LTV was withdrawn last month and replaced with a higher rate that requires a larger deposit (although it's still one of the best buys).

Fixed rates are widely deemed to have bottomed out, regardless of what happens to Base Rate. So now is definitely the time to lock into a fabulous five-year fix.

Top five-year fixed rates

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