Mortgage blog: Three reasons to take a five-year fixed-rate mortgage
Is it time for you to fix your mortgage rate? It's a question that millions of homeowners are considering with interest rates at record lows and experts predicting a rise in the base rate sooner than anticipated.
Here, we look at three compelling reasons why now might be the right time to take a five-year fixed mortgage rate.
Interest rates may rise sooner than expected
Last August, the new Governor of the Bank of England launched his ‘forward guidance' policy. Mark Carney suggested that the Bank of England would not consider raising interest rates until the UK's unemployment rate fell to 7%. At the time, that was not expected to be until 2016.
Now, though, unemployment is falling faster than expected and the rate is at just 7.1%. This suggests that any further fall would require the Bank of England to consider putting up rates. Most economists still think rates won't rise before 2015 although James Knightley at ING has concluded that "the probability of an interest rate rise in 2014 is increasing".
Recently, a senior member of the Bank of England has suggested that you should fix your mortgage to protect yourself against a "real risk of exposure to rising interest rates" in the coming years. Richard Sharp, a member of the Bank's financial policy committee, told MPs: "You have to make a judgment about the future. Certainly, my judgment would be this would be a good time to fix your mortgage."
Rates are cheap - but not for long
Some lenders, including the Yorkshire and Coventry building societies, have withdrawn their ‘best-buy' deals in recent weeks. However, there are still plenty of excellent deals to choose from. The Guardian highlights Tesco Bank's five-year fixed-rate deal at 2.79%, available to a maximum 60% loan-to-value (LTV) with a £1,495 fee. The Yorkshire is offering a five-year fix at 2.84%, available to 75% LTV with a £845 fee.
You will benefit from stability in the medium term
While two-year fixed rates may be a cheaper option initially, your deal could be coming to an end just as borrowing costs are beginning to increase.
So, many experts believe it can pay to consider a five-year fix. This will provide you with security over the middle term and protection against interest rate rises while they happen. But, don't forget to take into account the early repayment charges.
Keith Osborne, editor of Whathouse.co.uk says: "The penalties for coming out of a five-year fixed-rate deal can be significant. So, only consider this type of product if you're prepared to commit to a deal for that length of time."
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