news & tips

Should I Fix My Mortgage Rate?

If you have a tracker mortgage, you will currently be enjoying extremely low mortgage interest rates and monthly mortgage payments. Some of you will have had fixed rates that have ended and are now hovering in your mortgage company’s standard variable interest rate zone wandering what to do.

Familiar territory
I believe the economy is a virtual carbon copy of the 1980’s. Margaret Thatcher came into power in 1979 with the UK having record public sector debt and unemployment on the rise. She privatised every loss making state owned business to cut spending and she also, rather quietly, let inflation bubble away for 10 years and thereby devaluing the real cost of the public debt without ever repaying it.

In the late 80’s interest rates were hovering around 10% and speculators were preying on the strength of the pound as part of the Exchange Rate Mechanism. This drove Norman Lamont to increase interest rates by 5% in just one day. The long and the short was that mortgage interest rates were around 15% to 16% pa if you wanted to buy a house in 1989.

The economy, what to expect

• Expect this year to be the toughest year of the recession so far, not for investment markets but for well-known businesses to struggle.
• Expect unemployment to rise further. I suspect unemployment could be nearly 3m by the end of the year, just like the 1980’s.
• Expect inflation to slow this year but still to bubble away under the surface at 4-5% pa.
• Expect interest rates to remain low for another year or two. This would lead many to believe that mortgage rates will stay low. They will not.

Pressure on lenders, rates will increase
There are increased costs hitting mortgage companies soon. There will be more expensive, tighter regulations following a Mortgage Market Review after the banking collapse of 2008. Fee based advice rather than commission only selling starts in 2013 so profits may also fall. In addition new EU capital strength requirements are coming meaning that finance companies will have to build up reserves.

All these pressures on banks and lenders will not make mortgages any cheaper but likely to be more expensive over the coming years.

Should you fix your mortgage rate? Should you go for a tracker rate?
I suggest that this is the year to fix your mortgage rate. I also suggest that safety is key and you should fix for a longer period.

Should you shop around? Yes
You should always shop around for the best mortgage rate. It is expensive nowadays to remortgage with a new company as some have high application fees. Do shop around, but also compare your current mortgage lender even if the rate is a little more, it still may be easier and cheaper in the long run.

Should you pay capital off? Yes
Many lenders allow for overpayments usually of around 10% each year. My view is that interest rates in a few years time will rise very rapidly. We cannot just keep ‘printing money’ with quantitative easing and also inflating our way out of debt without a ‘payback’. Perhaps interest rates will not to be 16% pa, but certainly there is a risk of interest rates hitting 8-10% pa in say 7-10 years time.

You must plan to get your mortgage debt down now. Look at your budget and do make cutbacks. Even just overpaying your mortgage by £100pm or £200pm for a few years will have a dramatic effect on how much you owe in 5 years.