Mortgage Jenga

Are long-term mortgage fixes a good idea?

For close followers of financial forums, one oft-trotted line among brokers is that fixing one's mortgage has seldom been to the retrospective benefit of the homeowner in the past 25 years. Obviously there was the extreme example of those who fixed or remortgaged for long periods just before the eruption of the financial crisis, which saw Bank of England (BoE) rates plummet by 500 basis points in the space of 15 months. Yet even since then, credit has invariably become cheaper, and competition has increased in the market for mortgages.

Surprisingly, it is against this backdrop that a report by Moneyfacts last month revealed that the number of 10-year fixed-rate deals on the market has reached a record high of 157 - up from 120 a little over a year ago. On the other side of the coin, the number of tracker deals available has fallen to 242, now accounting for less than five per cent of residential mortgage offers.

So why, amid such uncertain economic conditions, with central banks around the world cutting rates, are Brits looking to lock in for longer?

A premium for security

The reasoning behind this trend isn't difficult to understand. Despite two increases to base rates since November 2017, we're still in the realms of 350-year lows at 0.75 per cent. So it becomes reasonable to ask: how much lower can rates possibly go? In ordinary times, probably not very much. 

On the contrary, there is plenty of scope for them to rise, rise, and rise some more. Those taking a long-term view over a decade are therefore plotting an ostensibly-sensible course of action by protecting themselves against what would effectively amount to a normalisation of rates in the future.

Indeed, there are other benefits too. Remortgaging usually involves a fee being paid by the homeowner each time, so fixing for a decade - or even for 15 years, as some deals now permit - automatically secures a saving on this front. And then there is the non-monetary benefit of having a predictable cost of living, and the long-term financial security this provides. Locking in for a longer term will always involve a present-value premium of some kind, but for many, it's a price worth paying.

What will actually happen to rates?

Regular readers of this blog will know we usually take a relatively hawkish view, and bemoan the inertia and missed opportunities on the part of the BoE during benign periods within the current economic cycle. Clearly, now is not the time to be hiking rates, with clouds of uncertainty gathering above a weakening global economy.

But it remains hard to fathom why ratesetters at the Monetary Policy Committee have all but communicated to markets that a rate cut is likely before the end of the year. This despite recent employment data once again confounding naysayers, retail sales bouncing back, and real wages climbing at their fastest pace in 11 years. 

True, the growth figures released the week before for the second quarter were a setback. But most experts agree that this was a direct result of unwinding the stockpiling that took place in the run-up to the original Brexit deadline at the end of March (as contrasted by the strong growth figures for Q1). If the numbers for the third quarter confirm that Britain is in recession, then that would be justifiable cause to wield the axe to rates. But until then, what is the need for a pre-emptive strike?

Let us not forget, too, that inflation has now ticked up above the Bank's 2 per cent target (2.1 per cent for July), which is its primary raison d'être. The rise in cost pressures has been largely attributed to a recent weakening of sterling, which is all the more reason to keep rates intact, and support the currency. It should be remembered by those on Threadneedle Street that the result of a softening in sterling also bears many of the same economic properties as a rate cut would anyway, so the need for such an action is surely negated for now.

Where does that leave homeowners?

Speculating on the future of rates has plenty of margin for error. After all, who could have foreseen that, more than a decade after the Bank slashed rates to 'emergency' levels of 0.5 per cent in March 2009, we'd still be in the same ball park today. All logic suggests that any significant movement in rates from here can only be upwards, but with the spectre of negative interest rates now a reality for some countries, it's hard to rule anything out.

All homeowners can do at this point is be pragmatic, and assess their individual situations. For those who value long-term certainty, and who don't expect their circumstances to change over the coming years, a long-term fix could be a great fit. For example, those with a 90 per cent LTV can access 10-year deals as low as 2.89 per cent, while those locking in for 15 years could fetch a rate of 3.45 per cent. Such borrowing costs drop incrementally for those remortgaging with a lower LTV too.

Five-year fixes have also grown in popularity, with the gap between these and two-year deals recently closing to within levels not seen since 2013. Yet so too has the two-year market become more competitive, putting those preferring to take a shorter-term view, or who might see their situation change in the near future, in a position of strength.

Comparing mortgage and remortgaging options isn't always easy, and there are a number of variables to consider. But by consulting a financial adviser, understanding the structure of your mortgage, and running various (soft search) quotes, you'll gather the information you need to decide what length of commitment - if any - feels right for you.

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