No matter when you decide to get on the property ladder, it will be one of the biggest commitments you make. That’s why it’s best to weigh up the positives and negatives of the timing, the general state of the housing market and any clues as to forthcoming market changes before you apply for a mortgage.
Most importantly, only you can decide when it’s best to buy a house and what type of mortgage you apply for. And there’s plenty of types to choose from. While trackers and Standard Variable Rate mortgages shift and change meaning your monthly repayments can go up or down, a fixed-rate remains the same for the duration of your mortgage term. And it’s fixed-rate mortgages that could come down in price first if the base rate does.
What is a fixed-rate mortgage?
A fixed-rate mortgage is just how it’s described - the interest rate is fixed by the lender, normally for a period of two, five or even ten years. One advantage of this type of mortgage is that you’ll know exactly what you’re paying per month and can budget around it. This gives you peace of mind that your payments won’t go up or down for the duration of the mortgage – even if interest rates change.
The downside of a fixed-rate mortgage is that if Bank of England interest rates fall, you won’t benefit from this. However, this may not bother you so much, particularly if you prefer the stability that comes with a fixed-rate mortgage and which you don’t get with other types of mortgage.
Keep in mind that if interest rates do go down before your fixed-rate mortgage term ends and you want to switch, there is likely to be a penalty fee. You’ll have to weigh up whether it will still be worth switching once this fee has been taken out.
Fixed or variable? Know your mortgages
If the loan you are taking out to buy your home will stretch you to your financial limit, it may be better to avoid taking out a tracker and gambling with interest rates. Interest rates can go up as well as down, and if you know you couldn’t afford your repayments if they increased, it may be best to fix at a rate you can afford.
Following the Mortgage Market Review, all mortgage lenders carry out a stress test on applicants. This is to determine whether you could still afford your mortgage if the interest went up – 3% is the figure typically tested for – and if you couldn’t, your application may be turned down anyway. Keep this stress test in mind when you’re looking for a mortgage. By fixing, you don’t have to worry about your payments changing when interest rates do.
The impact of Brexit
Since the Brexit vote, there has been speculation that the Bank of England will cut interest rates. While it didn’t take this direction at the Monetary Policy Committee’s July meeting, rates could still go down.
If they do, this is likely to affect all mortgages as lenders should lower their own rates in-line with the Bank’s. If you do take a punt on a fixed mortgage before rates come down, you won’t benefit if they do. But you may be willing to take this risk if now’s the right time for you to climb the next rung of the housing ladder.
In the end, you have to weigh up what is the best move for you and your household depending on your finances and the property you’re planning to buy. For more news and information on mortgages and home improvements, take a look at our blog.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.