Your mortgage: to fix, or not to fix?
Despite a lot of bluster in the months leading up to it, the recent decision by the Bank of England to hold base rates at 0.5 per cent was no surprise given the string of underwhelming economic data that emerged in the days prior to the announcement.
For savers, it was another kick in what little teeth remain after a decade of 350-year low rates. However, for borrowers, the streak continues, and debt remains incredibly cheap.
Most people with a mortgage will have been relieved at the Bank's decision last week. Yet this is undoubtedly an interesting juncture for such homeowners too, and the question at the forefront of their minds will be whether to fix their mortgage for a period of time - and, if so, for how long?
Don't fix it if it ain't broke?
Other than the 15-month spell between August 2016 and November 2017 (when the bank rate stood at 0.25 per cent), the Monetary Policy Committee (MPC) have not adjusted the base rate. In the wake of the financial crisis, slashing it, and subsequently holding it steady, had been necessary to revive an ailing economy.
One of the major beneficiaries were those looking to acquire a mortgage (or re-mortgage) in the aftermath, who, despite stricter lending criteria, were borrowing while base rates were more than 5 per cent lower than they had been in 2007. For those who had fixed-rate mortgages for any great length of time just prior to the recession, it proved a costly error.
To a lesser extent - those who decided to fix their repayment rate shortly after rates touched down at 0.5 per cent in March 2009 may have also ended up paying over the odds, as there is usually a premium built into longer-term fixes. Given that rates remained unchanged, a tracker mortgage, or even a variable rate mortgage, would have likely been cheaper in retrospect.
Yet this is the same conundrum that faces those with a mortgage today. Are rates actually set to increase, and is now the time to protect yourself by fixing it for the long run? Or is the pattern of the past decade set to repeat itself: lots of MPC insinuations of a rate hike that ultimately never materialises?
A shift in approach
According to analysis by Telegraph Money of mortgage broker data, there has been a significant increase in the number of people snapping up five-year fixes on their mortgages. For broker London and Country, five-year fixed-rate deals made up over 50 per cent of total business in April 2018, compared with just over 30 per cent in April 2016. Online firm Habito saw their share of five-year fixes rise from 27 per cent of total trade to more than 34 per cent from January to March this year.
Such trends are not unanimous across the industry though, and broker Private Finance has seen five-year fixes tumble from 63 per cent of their business five years ago to just over a third today.
And what about 10-year fixes? Habito report that around 10 per cent of the deals they do are 10-year fixes, while, for Private Finance, this figure slumps to less than one per cent. Yet, further afield, it would appear that competition within this market is intensifying, as Moneyfacts recently reported that there are over 120 10-year fixes available.
The appeal of deals like these is two-fold: firstly, they provide a shield against future base rate increases, and the certainty of knowing what you'll be paying for the following decade. Secondly, the saving from otherwise having to fork out for broker or arrangement fees in the intervening years could be in the thousands.
Is a long-term fix the way to go?
Unfortunately, there are some drawbacks to fixing your mortgage for 10 years. A lack of flexibility is one: you’ll encounter costly exit fees (or early repayment charges) if you have a change of circumstances and cancel the agreement early (albeit that some lenders offer the opportunity to exit for free after five years). And while many such deals can be transferred if you move to a new house, your affordability will need to be reassessed each time, and any additional required borrowing may be expensive.
It is also fairly common for tight limits to be imposed in terms of loan-to-value (sometimes as little as 50 per cent) when it comes to 10-year fixes. Furthermore, fees tend to be a lot higher than shorter-term deals.
Two or three-year fixed deals offer far superior rates, lower fees and improved flexibility, and, on that basis, continue to be popular. On the other hand, the rising popularity of five-year deals suggests that many homeowners are seeking a compromise between protection from widely-anticipated rate increases, and the ability to be flexible in the future.
So, what's right for me?
Each individual situation is different, and guidance on such matters should always be sought from a qualified financial advisor. Nevertheless, there are some important rules of thumb to bear in mind. If you have a lot of equity in your property, and perhaps are more settled in terms of work and location, then a five or 10-year fix may well be worth considering.
If, however, you are a young professional, or have a new family and can't be sure what the future holds, then the flexibility of a two or three-year fix (or even no fixed rate mortgage at all) could be the solution.
And then, of course, there is the issue of rates. Experts, have got their predictions wrong time and again. So it is very difficult for ordinary homeowners to know whether the 'very gradual' rate increases promised my Governor Mark Carney in the coming years will actually materialise - especially against an uncertain economic backdrop.
But whichever way you decide to go, it is important to think long and hard about the existing structure of your mortgage, and whether a better option lies in wait. The savings, and/or peace of mind, could be substantial.