Long-term fixed rate mortgages are at record lows, with some five-year deals below 3%. So is now the time to switch? We asked our Money Saving Expert Martin Lewis.
Why are rates so low - interest rates have been 0.5% for years?
Quite right. The Bank of England base rate's been 0.5% for over three years and the Bank’s governor has recently said he sees little point in cutting it further.
Yet here we’re talking fixed rates. Once you get one, the rate is, well, fixed for a number of years. The rate at which new fixes are set varies, and is partially based on the City's long-term rate predictions.
As the current economic outlet is sadly dismal, that means many are at record lows. So if you've decent equity in your property and a good credit score, two-year and five-year fixes are now at 2.95%. The real doozy here is that the long-term fixed rates are as low as the short term, though the fees on five-year fixes are higher.
For every 1% you can cut on a £100,000 repayment mortgage at most big banks' standard rates, it can save you £600 a year.
Who should be fixing?
As it is impossible to predict the market (fixes could always get even cheaper) it's more important to focus on your own finances. So here are the key questions:
- How important is certainty to you? The big benefit of a fix is it gives surety of knowing exactly what you’re paying – so you can budget. The more stretched your finances, the more valuable this certainty is to you.
If you fix for the sake of certainty, don’t look back in hindsight if it later wasn’t cheapest and think you made a mistake. You made the decision based on surety with the knowledge available at the time.
- Do you have decent equity? The best deals require you to borrow up to 60% of what your home is worth, though good deals are still available at 75% (and some deals at 90%).
- What are the fees? Check for fees. For some, especially on smaller mortgages, a lower fee and higher rate wins.
- Are you locked in to your current deal? If you’re on a standard variable rate, as many have been moved to in recent years, you’re free to move, so check how your current rate compares to what you could get.
Yet some mortgages, especially many existing fixed and discount rates, have redemption penalties, where you pay a chunk to switch before the ‘fix’ or ‘discount’ ends. In that case, it's often worth staying put. Yet for a few people right now, it works out.
If you’re not sure, it's worth speaking to a ‘whole of market’ mortgage broker to help do the calculations for you.
Will fixes get cheaper?
Best buy rates, especially for five-year fixes, are incredibly low, so a safe option is to grab 'em now. But could they get even cheaper? I asked broker David Hollingworth, from London & Country, for a view on this. He says: "In the near term, there's every chance more lenders will drop rates, though we need to wait to see if the very lowest will drop more."