Fixed mortgage rates have been getting cheaper and cheaper recently, with market leading fixed rates hitting all time lows.
With this is mind it could be tempting to fix rate now, but could rates have further to fall?
Mortgage rates fluctuate all the time depending on the mortgage market and influences from the wider economy. Getting the lowest rate can save you thousands of pounds in interest payments relative to a higher rate.
But, before you chase the cheapest rates don’t forget to take arrangement and booking fees into account. These fees can mean the mortgages with the lowest rates might not actually be the cheapest option.
Fixed rate mortgages
Fixed rate mortgages ensure your monthly repayments remain at a set level for a few years, typically either two, five or ten years.
The advantage of a fixed rate mortgage is being able to plan your costs for several years. However, the obvious disadvantage is that if rates fall you could be stuck on a potentially much higher rate than the best deals on the market.
Cheapest ever fixed rate mortgages
Mortgage rates have been generally falling ever since the base rate of interest was cut to 0.5% in 2009 during the financial crisis by the Bank of England.
Variable rate mortgages led the way with a few rates under 1% appearing in late 2014. But, fixed rate mortgages have followed and now the market leading deals are hovering at rates around 1%.
What are the lowest rates right now?
HSBC are offering a fixed rate of 0.99% for two years before reverting to 3.94% (variable), to borrowers with a 65% LTV, but the upfront fees are a fairly steep £2,051.
There are several other fixed rate deals sitting near the 1% mark. If you have a at least a 40% deposit (ie can borrow at up to 60% LTV), the lowest rates are:
- First Direct are currently offering a fix of 1.18% for two years, before reverting to 3.69% (variable), with upfront fees of £1,707.
- If you want a low upfront fee, Accord mortgages offer a two year fix of 1.79%, before reverting to 5.79% with only a £90 upfront fee.
Lowest ever ten year fixed rate mortgage
If you’d like the security of fixing a rate for ten years, now may be a good time to fix, as average ten year fixed rates are at historic lows, hovering at around half their historic average and are trending towards falling further.
However, past market behaviour is no indication of what will happen to rates in the future. Ten year fixed rates might well continue to fall, so if you’re not ready to fix now, it could be worth keeping your eye on the market.
Coventry Building Society are leading the way launching the lowest ever ten year fixed rate mortgage of 2.39%, however the upfront fees run up to £1,449 and you’ll need at least a 50% deposit to be eligible for the mortgage.
Why are mortgage rates becoming so cheap?
Mortgage rates are affected by a number of influences, not least competition between lenders.
But most notable are the base rate of interest set by the Bank of England (BoE) and ‘swap rates’ in the City of London (the price banks sell money to each other for), both of which have been falling.
Base rate of interest
The base rate of interest is the price of money, it is the rate banks can borrow money at.
It has been at a record low of 0.5% for almost seven years now. A rate rise has been expected for several years now, but has been continually deferred.
After the results of EU referendum on 23 June 2016, the BoE has hinted that they may even cut rates before the end of summer 2016.
The steady decline in fixed mortgage rates reflects the likelihood that banks don’t believe the base rate will hike up anytime soon.
Capital reserves released
As a measure to stablise the economy after the referendum results the BoE eased up the restrictions over the amount of capital banks need to keep in reserve.
This will free up banks’ cash to lend, or to sell on the City’s money markets, which may push rates down further as a consequence. However, the public’s appetite for borrowing will also have an affect on this measure.
Could mortgage rates fall further?
It does look likely that mortgage rates will fall if current market conditions hold (especially if the BoE does cut interest rates), but without a crystal ball it’d be impossible to predict what will happen to rates.
In any case, before fixing a mortgage rate it’s best to consider your own financial circumstances, rather than pursuing the lowest rates and waiting for the perfect moment to fix.
Or as Mark Carney, Governor of the Bank of England, said in the last official BoE announcement:
“We are advising people to be prudent…If you are taking out a mortgage, at some stage, during the life of that mortgage, conditions will be difficult.”
In essence, fix a rate when it is right for you.
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