New research by Moneyfacts.co.uk has suggested that the cost of fixed-rate mortgages has started to rise.
This is in reaction to the suggestion from the Bank of England that interest rates could start to rise towards the end of this year.
Mark Carney, Bank of England Governor, declared in a speech on the 16th July: “It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
He predicted that in the medium term the interest rate was likely to reach 2.25%.
Time to fix?
Mortgage experts are recommending that if borrowers haven’t already taken advantage of the low mortgage rates available at the moment then they should do soon, before interest rates drive costs up.
According to Moneyfacts.co.uk, two mortgage providers have already withdrawn several of their fixed-rate deals since Mark Carney’s speech.
If borrowers wait too long they may miss out on the best-fixed rate deals – and once the interest rate does rise, those on a tracker deal/standard variable rate mortgages are going to see their monthly payments start to climb.
You could look at a 2-year, 3-year, 5-year or even a 10-year fixed-rate mortgage depending on how long you want to fix for. Remember that fixing now may mean moving to an interest rate that is higher than the rate you are currently paying. Whilst this will cost more now, the benefit should come through when interest rates start to rise.
How would a rise affect you?
If you’re on a variable rate mortgage (for example your lender’s Standard Variable Rate) currently and you’re wondering how much your payments would go up if the interest rate did rise then you may find the table below useful. Alternatively, you can use this handy interest rate calculator.
Of course, interest rates are likely to go up gradually: whilst you might be able to cope with a 0.25% increase, or even a 0.5% rise you might find that you need to make more and more cutbacks to other spending to meet your new repayment. And it some point you might find that your repayment becomes unaffordable. If you're unsure how you would cope when rates do rise, then it makes sense to consider fixing your mortgage now.
Current monthly payments on a repayment mortgage (based on a typical lenders SVR of 4% over 25 years)
Interest rate increase of 0.25%
Interest rate increase of 1.75%
£14.19 extra a month / £170.26 extra a year
£103.05 extra a month / £1,236.62 extra a year
£21.28 extra a month / £255.38 extra a year
£154.58 extra a month / £1,854.93 extra a year
£28.38 extra a month / £340.51 extra a year
£206.10 extra a month / £2,473.24
£35.47 extra a month / £425.64 extra a year
£257.63 extra a month / £3,091.55 extra a year
The decision whether or not to fix, and if so for how long, isn’t easy. To a certain extent, it relies on predictions of what interest rates may do in the future – which even the experts disagree about. If you aren’t sure that it may make sense to get advice from a mortgage expert. Think carefully whatever you decide – it’s important that you can keep up the repayments on your mortgage and if you don’t your property may be at risk.