by Mark Johnston
The sustained low interest rates has resulted in around two thirds of homeowners choosing to stay on their lenders standard variable rate. With many in the industry warning of an interest rate rise, borrowers much now decide on whether they should fix their mortgage or remain on a variable rate.
The Bank of England has already raised their concerns over the number of UK families that are exposed to interest rate increases no matter how small. The huge rise in borrowers on standard variable rates equates to around a 50% increase when looking at the figures over the past five years. Such large numbers on variable rates can only mean that thousands of households are left open to a high risk of difficulties if or more accurately when, interest rates rise.
The Bank of England warned at the same time that interest rates need to go back to their ‘normal’ levels which is about 5%. For many households this would be an almost impossible increase taking a borrowers monthly payments on the average £150,000 home from around £670 a month to almost double of £1120.
Borrowers would need to reduce their outgoings by around 15% to be able to keep up with the increases otherwise they could find themselves in difficulties which may result in the loss of their home.
A leading economist at IHS Global Insight, Howard Archer pointed out that any increase in UK interest rates would be “bad news” for borrowers and the housing market as a whole because mnay families would be left unable to pay their mortgage.
Melanie Bien, a mortgage expert pointed out that most of the industry is in disagreement as to when interest rates will go up and to what level. She went on to say: “If you would struggle to pay the mortgage if rates were to rise, then a fixed rate is the answer,” she explains. “They are unlikely to get any cheaper. Indeed, lenders are starting to increase their fixed rates, so you may want to secure one sooner rather than later. If you wait until interest rates are rising, you will find that fixed rates will be priced much higher.”
Another expert in mortgages David Hollingworth suggested that each person should take their own circumstances into consideration and said: “Borrowers have to focus on their own position and not think about anything else. If they cannot afford base rate rises then they should think about a fixed-term mortgage,”
He went on to say: . “Those that have managed to put aside most of what they saved from being on a cheap SVR or used it to reduce the size of their mortgage will be in a decent position now, especially as loan-to-value (LTV) is so crucial to getting a good mortgage these days.”
Other advisors are suggesting that many lenders will allow borrowers to agree a mortgage up to six months in advance. So those on a cheap variable rate might be able to agree a good deal whilst still taking advantage of the current low rates.
Melanie Bien finished by saying:”Although two-year fixes are cheaper than five-year deals, there isn’t much in it and the latter makes more sense in the current interest rate environment,” Bien says. “If rates do start rising in the second part of next year, as many believe they will, those who take out a two-year fix now will have to remortgage again just when rates are higher. A five-year fix, on the other hand, gives you security for longer.”
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