August 20th, 2019 | by Micheal Pando-
I’ve chatted a lot on twitter to people about the ever changing interest rates and whether to fix your mortgage rate now while they are ‘cheap’ or stay on standard variable rates.
Now, I’m not a mortgage broker, so this is only my opinion, but remember, mortgage brokers do have a vested interest in getting you to move companies – they earn a fee for doing so.
Nothing wrong with that, just stating a fact.
Everyone should know by now that the reason that banks want you to fix your mortgage is because they seek to cover their own rear ends, even when things go incredibly pear shaped and they end up in the poop themselves, the bottom line (!) is that they are there to make money.
There has been a lot of discussion in the press of late as to whether people should fix their mortgage or not. Generally this comes down to personal circumstances. That said, one main thing to remember is that if you want to change mortgages there are fees involved and these must be taken into account along with the loan to value and the interest rate.
Also, banks are sneaky, they add all sorts of bits to the other end of a loan like EDR ( fees for early redemption) or a much higher rate when you come off the promotional fixed rate. Banks are in such a state now that they are even refusing to renew fixed term loans and are calling them in.
For example, a current loan from Skipton has a 90% loan to value, five year fix at an eye watering 6.49%. Whichever way you look at it, that is a painful loan. At the moment banks want you to fix your mortgage and put in a big fat deposit to secure a lower rate, or, they want a massive interest rate. In some cases they want both. Either way they have covered their back end nicely.
The current crop of 3 year fixed mortgages are at around 3.5 to 4% for those with a mighty deposit of 20 to 40%. The 5 year fixed are hovering around 4.6 to 4.9% but all with huge deposits required. This is known as having you cake and eating it. 🙂
In my opinion, if a bank charges 4.5+% interest for a fixed term of 5 yrs-to me the message this sends is; “this is where we expect the interest rate rises to possibly end up within the next five years.” ( Plus a little on top for good measure.) Looking at the rates available, banks clearly feel that we are heading back towards the 5% mark within the next 5 years.
So, with that in mind,do you really need to listen to the banks and fix your mortgage now? After all, it’s very likely that rates will creep up over a long term. They will not be 1% one day and a month later 5%. There is no need for panic. Banks offer fixed rates to make more money. It’s for their benefit not yours. Also, many of the new mortgages will rise instantly after the fixed term with mortgage contracts stating up to 3% over the base rate for the end of the fixed period. This means a mortgage at 4% now could shoot up to 7 or 8% when you come off the fix, with no guarantee that rates/ equity will have recovered by then. Or to put it another way, your payments could double.
Work out how far rates need to rise before the mortgage rate puts you in trouble financially.
Like any business, banks need to show regular income on their balance sheets so they can plan future lending. Fixed terms do that for them.
Another reason banks want huge deposits and to fix your mortgage, is because their vaults are empty due to all the ‘virtual lending’. They need to get more physical money in the vaults so they can comply with international banking laws. Without this they cannot lend in any form. So a big deposit or high interest rate- or if they can get away with it- both, will do very nicely thank you.
Think long and hard before taking out a fixed rate and be sure to compare the costs over the whole term of the loan, not just the fixed term.