by Mark Johnston
The news has been full of reports suggesting that now is the time for borrowers to fix their mortgage deal. Although this may be great advice for some its not the best advice for everyone. The problem is the same for thousands up and down the country. Should they fix their mortgage deal now and protect themselves from future interest rate increases or risk it and stay on a variable rate which may end up being more cost effective in the future. One things for sure, lenders will push their fixed rate deals as they want to lock their customers into a deal so if reports from the industry warn of a rise then so be it.
Many thought that interest rates would remain low throughout 2011 but rising inflation is starting to put pressure on the Bank of England’s monetary policy committee to raise interest rates. This expectation has been a contributing factor to swap rates rising over the past few months which has had a major effect on the price of mortgages. Many lenders have already increased their prices or pulled some of their best deals from sale.
Even though rates may well increase, borrowers are still taking a big gamble if they fixed their mortgage. Most people believe that any increase will only be minimal whilst analysts are pointing out that borrowers would need to see interest rates rise sharply to see fixing their mortgage pay off.
A leading economist has pointed out that Bank of England base rates would need to climb as high as 3.25% in the next two years for a fixed rate mortgage to be worthwhile. Without interest rates reaching this level, variable rate loans would still be cheaper.
The report used an average sized mortgage as an example of around £150,000. A two year fixed deal would cost around £921 which is £84 more than a variable rate loan.
A leading economist at Capital Economics, Paul Diggle said: “We continue to think that the case for an immediate rate rise is weak. And even if Bank Rate were raised within the next few months, the chances of this signaling the start of a sustained round of tightening are slim. If we are right, then a borrower taking a fixed-rate now will find themselves paying considerably more over two years than those on variable-rate deals.”
Another expert Melanie Bien, of mortgage brokers Private Finance, said: “With a significant gap between the pricing of variable and fixed rates, there has been much analysis as to how much interest rates need to rise to make a fix worth your while. But while predictions and forecasts are all well and good, the truth is nobody knows when interest rates are going to rise and by how much. Home owners must therefore look at their own situation and assess whether their finances could cope with a 1, 2 or even 3 per cent increase in the Bank Rate over the next couple of years. If they would struggle, there is a strong argument for a fixed rate, which will bring peace of mind.”
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