The chance to lock into an ultra-cheap mortgage is set to disappear, borrowers are being warned, as a number of factors now point to a period of rising rates.  Those who have not yet switched to a fixed-rate deal should consider this as an option.

Mortgage rates have been falling for years, driven partly by a historically low Bank Rate but also by lenders’ increased competition for a smaller overall pool of borrowers.  In the period immediately after the financial crisis, when it has been difficult for many borrowers to obtain mortgages, most lenders relaxed their criteria. Those with smaller deposits in particular are now more easily able to secure loans. In order to be able to move to a lower rate, borrowers need to be in a situation where there are no penalties for exiting their current deal. They could also be at, or near the end of, existing fixed-rate deals.

Many borrowers roll over onto standard variable rates when their shorter-term deals end.  Variable-rate mortgages come in many forms, including “trackers” where repayments follow the movement of the official Bank Rate. Lenders also have their own “standard variable rates” which they set themselves and which are loosely based on the Bank Rate. Should you opt for a fixed rate of two years, or should you go for those deals offering a longer period of certainty, such as five years or even ten?  Historically two-year rates have been most popular. In general, the shorter the term, the lower the rate. But one trend in recent years has been for longer-term rates to fall steeply as well.  Apparently longer-term fixes are becoming more popular.

Recent analysis indicates that most people now opt for between two and five year fixed rates, but the gap between five and 10-year rates has narrowed and that brings more people in for longer deals. Of course, that ties people in and that’s harder for some people to come to terms with. Borrowers cannot expect rates to stay this low forever. With higher inflation, locking into a rate looks like the right thing to do. Can the Bank Rate really go any lower? There’s very little upside in having a variable rate that shadows the Bank Rate. Fixing your mortgage rate makes sense in a range of market conditions. But the following four points explain why, now in particular, fixing your rate should be a considered option.

 

  1. Some mortgage rates are already creeping up

Bank of England data shows the cheapest two-year fixed deals may have already come and gone. In November last year, the average two-year fix was 1.31pc, but by the end of February 2017 the average stood at 1.35pc.

Interbank lending rates – known also as “swap” rates – are an indicator of where future mortgage rates will head. That’s because they reflect the cost to the banks of securing the money they lend. The two-year swap rate has risen 40pc since October, and the five-year rate has nearly doubled – up 95pc.  This suggests further rises are on the cards for homeowners.

 

  1. Inflation will hit 2.7pc this year

Inflation will rise above the Bank of England’s official 2pc target in the first four months of the year, according to the Office for Budget Responsibility. It said inflation will peak at 2.7pc, as measured by the consumer prices index, in the last quarter.

A weakened pound, the rising price of oil and insurance premium hikes will force prices up over the course of 2017, the OBR said in notes published alongside last week’s Budget.

You have to go back to December 2013 for the last time inflation hit 2pc.

A rise in the cost of living will put pressure on the Bank of England to raise its leading Bank Rate from its current all-time low of 0.25pc.

Variable mortgage rates would rise in line. Fixed rate deals for borrowers who decide only then to switch would also be higher.

 

  1. Political uncertainty

Future wage growth and cost of living are outside of households’ control. Fixing mortgage costs means at least one element of personal finances is predictable.

The triggering of Article 50 by the Government signals the start of a two-year countdown to Britain’s exit from the EU. Taking out a five-year (or longer-term) mortgage loan locks you into a rate today that will fix repayments well into Britain’s first years outside of the EU.

Political uncertainty in Europe and further afield could also impact Britain’s economic growth, the value of the pound and interest rates.

 

  1. Philip Hammond’s Budget could limit your future borrowings

The Chancellor has faced a furious backlash since last week’s Budget, not least from members of his own party.

His attack on business owners and the self-employed included plans to increase National Insurance rates (recently withdrawn) and reduce the tax-free allowance for dividends. Both measures could spell a fall in the incomes of millions of people.

Lenders must apply strict “affordability” checks before handing out mortgages, so anything that cuts borrowers’ income will restrict the amount they can borrow.  Behind the scenes, lenders will factor this in. For the self-employed it can be hard enough to get a mortgage as it is, you normally need proof of at least two years of income.

 

 

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