The era of low fixed rate mortgages could be at an end as the likelihood of a base rate rise increases, but when is a rise likely, what’s happened to fixed rate mortgages over the past year, and what should those looking for a mortgage do?
When will rates go up?
BoE Governor Mark Carney has been coy about when the base rate will rise and by how much, but he has dropped some solid hints that rises are coming next year.
Speaking at the TUC conference in September he said: “…with many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer”.
Since 2009 interest rates have been fixed at historic lows of 0.5% as part of an effort to get the economy moving.
However, at their last meeting the BoE’s nine-strong Monetary Policy Committee (the body responsible for setting interest rates) had its first split vote on rate rises for 5 years; with 7 against and 2 in favour of a raise.
With a string of positive economic data (most notably the unemployment rate falling from 7.1% to 6.2% and the Office of National Statistics revealing that the economy grew faster than expected in the second quarter of the year) coming in over the past year and average house prices rising 10.5% thus far this year, the Bank of England is coming under increasing pressure to cool the market and raise rates.
What does this mean for fixed rate mortgages?
Those who entered into 5-year mortgages during 2013’s lows will now be seeing the benefits of having a fixed rate agreement.
However, for anyone renewing or considering a fixed mortgage it could be the beginning of the end for low fixed rates. As the big lenders believe a rate rise coming – although not by how much or exactly when – they have been steadily increasing the cost of fixed rate mortgages over 2014.
This is to anticipate their own long term borrowing costs and predict any future rate hikes. So whilst the base rate has remained fixed at 0.5%, the average rates from all lenders show a steady and noticeable rise from their lowest point at the end of 2013:
In January 2014 the average interest rate on a five-year fixed mortgage for somebody with a 75% LTV mortgage was 3.34%, the average has now risen to 3.77% and seems set to continue going higher.
Keep calm and carry on
Despite expectations of a rate increase, Governor Carney has been keen to keep the money markets calm, stating “…the precise timing of the first rate rise is less important than our expectation that, when rates do begin to rise, those increases are likely to be gradual and limited.”
Fixed, variable or tracker?
There are three ways of managing interest rates on your mortgage.
- Fixed rate mortgages are useful if you want to have set monthly repayments. They can be very beneficial if interest rates rise significantly as your repayments will not become more expensive, however you will not benefit from falling interest rates.
- Tracker mortgages track the BoE’s base rate plus a pre-agreed markup, for example, your mortgage could be base rate +3%, so currently you would be paying interest of 3.5%.
- Variable rate mortgages can often offer cheaper interest rates as lenders compete to offer the best rate. However rates vary at the discretion of the lender and they may raise the cost of your mortgage.