How do likely interest rate rises in 2016 affect your mortgage decision?
Posted 22 January 2016 by Nick Parkhouse
According to the Daily Telegraph, rising interest rates will be “the big finance story of 2016”. After the US Federal Reserve raised rates for the first time in years, many experts expect the Bank of England to follow suit and to increase the base rate in 2016.
So, what does a possible interest rate rise mean for your mortgage decision?
Fixed rates continue to be popular
Over recent months, around nine in ten borrowers have chosen a fixed-rate mortgage rather than a discounted or variable rate deal. The Daily Telegraph reports that “industry figures show that more than 90% of those buying or remortgaging are buying fixed rates”.
Fixed-rate mortgages ensure that you protect yourself against future interest rate rises. You will pay the same amount during the fixed-rate period irrespective of what happens to general interest rates.
The cost of fixed-rate mortgages remains historically low, meaning that the 'premium' for the security of a fixed-rate mortgage is currently very small.
Waiting could result in you paying more for your fixed rate
As any base rate rise draws closer, there is likely to be a rush towards fixed rates. However, as money markets believe that a rate rise is more likely, the cost of fixed-rate mortgages is likely to rise.
'Swap rates' - the rates at which lenders 'buy' money for fixed periods on money markets - rose in early December. Two-year swaps, which heavily influence the pricing of two-year fixed rate mortgages, rose from 0.9% to 1% while five-year swaps have risen from 1.36% to 1.45%.
So if you're considering a fixed rate it could pay to take a product early in the year, as the deals available are likely to become more expensive as the likelihood of a base rate rise increases.
Be careful if choosing a short-term fixed rate
Over recent years, many borrowers have elected to take short-term fixed rates of two or three years. These have offered some exceptional rates, with record breaking deals falling as low as 1%.
However, if you are thinking of taking a short-term fixed rate you should consider that rates are forecast to be rising in two year's time. This means that if you choose a shorter-term fixed rate you will need to bear in mind that costs when those deals end are likely to be higher.
Discounts could still offer value if interest rates rise slowly
The difference in cost between fixed- and tracker-rate deals is small, meaning that choosing the security of a fixed-rate deal looks like a no-brainer.
However, trackers can offer the benefit of flexibility as many don't carry early repayment charges. This is useful if you want to keep your options open, you are expecting to move home or you expect to pay a lump sum from your mortgage in the early years.
In addition, even if interest rates are going to rise in 2016 they are expected to increase very slowly. Rates are not expected to rise substantially over the next five years and so even if the base rate does increase, your mortgage repayments are only likely to creep up rather than rise sharply.