Mortgages: Should you stick with a variable rate or fix?
Published: 15th Apr 2011 15:51:08
Interest rates have been held at a record low for 25 months now.
This week, we will find out how members of the Bank of England's Monetary Policy Committee voted at their last meeting.
But analysts say it is a question of when, not if, rates will go up.
Millions of homeowners will be affected when they do change.
And they have to decide if switching to a fixed-rate deal would be a better option.
Before the recession, Mark Strode, a health care manager from Walton on Thames, was paying about £1,500 each month for his mortgage.
He is on a tracker rate of 0.1% above base rate, so he saw his payments go down dramatically as base rate fell in the wake of the banking crisis.
Now he is paying closer to £800.
"We're managing to overpay by about £250 a month," Mark says.
"But I am worried that interest rates are going to shoot up."
He has two children now and says his money is not stretching nearly as far as it used to.
With the rising cost of living he does not think he could cope if rates went up dramatically.
About 69% of people with mortgages are on variable rates, according to industry figures.
That means many of them, who are enjoying unusually low monthly payments now, could be affected immediately when interest rates do rise.
Mortgage expert Melanie Bien, from the mortgage advisors Private Finance, says many homeowners are wondering if they should move onto fixed deals before any changes in their rates.
However, she does not think such an increase will happen very soon.
"The expectation was that they were going to go up, perhaps next month, but inflation has fallen off slightly, so we're now expecting a rise towards the end of the summer," she says.
"And we're also not expecting rates to shoot up to 5%, but to start rising much more slowly," she adds.
So, she is predicting that base rate will be at 2% by the end of 2012, maybe rising to 3% after that.
The biggest benefit of switching to a fixed-rate mortgage is that it gives you peace of mind.
You know exactly how much you need to pay each month, and so you can budget accordingly.
However it might not be the cheapest option.
Many companies charge expensive fees for swapping from one mortgage deal to another and the new rates are not always particularly attractive.
For example, the Nationwide has worked out that if someone has a repayment tracker mortgage for £150,000 at a rate of 1.99% now, they will pay £760 a month.
If they switched to a fixed-rate deal, even at a low mortgage rate like 3.05%, their payments would be closer to £835.
So the fixed-rate deal would not save them any money until base rate had gone up several times, to 1.75%.
If they had to pay any extra fees, it could take even longer for them to feel the benefit.
Home-owners could in fact find it difficult to switch to cheap fixed-rate deals.
The best ones are only available for people who can pay big deposits, or have large chunks of equity in their homes.
Sue Anderson, from the Council of Mortgage Lenders (CML), admits it is not an easy time for some borrowers.
"People who are seen as a bit of a credit risk are going to find it harder, in some cases, to get a mortgage at all," she says.
"We're also seeing that people who are also quite good credit risks are finding it harder than the last time they took out a mortgage.
"That's probably not going to change any time soon," she warns.
She says this is partly to do with the tougher regulation of mortgage companies and their lending.
"What we now see is that lenders are having to hold maybe six to eight times more capital, more rainy day money, against a 90% loan than against a 60% loan," she explains.
"So the effect is to make it more difficult to lend at higher loan-to-value ratios."
There are some steps you can take to boost your chances of getting the best possible rates.
Melanie Bien has three main tips.
"The first thing to do is overpay. Reduce the amount you owe as much as possible," she says.
"Secondly, check your credit history, make sure there are no mistakes on there.
"And the third is to pay any debt you have. So, if you've got any debts on your credit card, pay that down," she advises.
At 06:58:11 in Northern IrelandSecretary of State Theresa Villiers will meet the new Irish Foreign Affairs Minister Charlie Flanagan later on Wednesday.
At 06:39:01 in Northern IrelandPlans for a huge new cemetery beside the south Antrim village of Dundrod are meeting strong opposition from a group of residents.
At 06:28:03 in WorldAt least 21 people were killed when their bus swerved off a mountain road and fell into a gorge in the northern Indian state of Himachal Pradesh.
At 06:14:50 in EnglandMore than 50% of customers of telecom company JT said they were not satisfied with the home phone service they receive, a survey has found.
At 06:14:23 in EnglandA collection of more than 200 hidden photographs that chronicle the building of Cambridge University Library are to go on public display.
At 06:10:31 in EnglandPlans to build 750 homes on land owned by artist Damien Hirst in north Devon are to be considered by councillors.
At 06:07:30 in EnglandLeftover ash from Plymouth's new waste-to-energy incinerator is to be shipped to the Netherlands for recycling.
At 06:04:29 in EnglandA 'Shed of the Year' finalist who lets his garden shed out to holidaymakers has been told to remove it because it does not have planning permission.
At 05:55:07 in TechnologyThe UK government will shortly outline measures to permit driverless cars to use public roads by next year.
At 05:48:58 in HeadlinesSuggestions that the deadly virus Ebola could reach British shores lead to front-page headlines.
Harvard CitationBBC News, 2011. Mortgages: Should you stick with a variable rate or fix? [Online] (Updated 15th Apr 2011)
Available at: http://www.ukwirednews.com/news/146528/Mortgages-Should-you-stick-with-a-variable-rate-or-fix [Accessed 30th Jul 2014]
News In Other Categories
Felix Klieser was born with no arms, so uses his feet to do most things. This includes eating, dressing, writing ... and being a professional French horn player.
Everyone loves a winner but the crowds at the Commonwealth Games in Glasgow appear to be just as keen on those who lose in style.
Demands for search engines to remove personal data from the web to respect people's "right to be forgotten" are unreasonable, a group of peers says.
Welsh swimmer Georgia Davies says winning Commonwealth gold in the 50m backstroke has made all the hard work she has put in since taking up the sport worthwhile.
With the doors to its brand new £1million training centre officially open, one of the UK's leading apprentice training providers, Bristol based S&B Automotive Academy, is showcasing its world-class facilities by launching a series of foreign student exchanges for the first time in its 41-year history. To get a flavour of what life is like as an apprentice in the UK, the Academy hosted 16 apprentice engineers and bus drivers from the G9 Automotive College in Hamburg, Germany, as part of a Europe-wide vocational training initiative called the ‘Leonardo Programme’ with support from the European Social Fund. In a reciprocal arrangement, S&B will be sending nine apprentices to Germany during February 2012 so that they can get an appreciation of life in the automotive industry on the Continent. A further three German exchange groups are being planned for next year. Designed to assist the development of vocational skills and training across Europe, including work placements for trainees, the Leonardo Programme has a budget of €1.75bn, which is helping to encourage UK organisations to work with their counterparts abroad. In what is expected to be another challenging year for employers in the UK automotive sector, S&B’s Chief Executive, Jon Winter, claims that the exchange initiative will bring many benefits to the Academy and its apprentices: “In a world of global automotive brands, it’s important for our learners to understand the international context of the industry they have chosen to make their career. This new exchange programme will enable apprentices and Academy staff alike to achieve a better understanding of the challenges and opportunities within the automotive arena in Europe. With the Academy’s influence also extending to the USA and Asia, there’s every possibility that this initiative could move further afield in the future.” Continued Winter: “The need for skilled technicians across the world is on the increase and we actively encourage our apprentices to look at broader horizons during their training. Many of them have already learned the phrase ‘Vorsprung durch Gelehrtheit’, quite simply, ‘Advancement through learning.” In the 2010/11 academic year, S&B doubled the number of successful Apprenticeships over the previous year with some 350 apprentices graduating from the Academy. At the same time, achievement levels reached an all-time high with an overall success rate of 85%. For those learners on the Advanced Apprenticeship three-year programme, success rates were even higher, at over 98%. PHOTO CAPTION: As part of their exchange visit, S&B Automotive Academy arranged for the German apprentices to visit Hampshire bus operator, Bluestar, at its Barton Park depot. The students are pictured with S&B’s Andy West (3rd right) and Steve Prewett, Bluestar’s Area Engineering Manager (2nd right). Ends http://www.sandbaa.com
HSBC bank has written to Finsbury Park Mosque and other Muslim organisations and individuals in the UK to tell them that their accounts will be closed.