Thinking of fixing your mortgage? How the current market might affect your decision

Posted 25 November 2015 by Nick Parkhouse

The pros and cons of taking on a fixed-rate mortgage rely on a number of short- and long-term factors...

Over recent months, the vast majority of mortgage borrowers have chosen fixed-rate deals. Research suggests that around nine in ten consumers are currently choosing a fixed-rate product rather than a discounted or a tracker rate deal.

However, over the last couple of weeks mortgage lenders have been forced to pay more for the money they pass onto borrowers, leading to speculation that the cost of mortgages is set to rise.

So, should you fix your mortgage now, or does recent economic news mean you shouldn't worry?

Cheap fixed rates rely on lenders being able to buy money at a low 'swap' rate for a certain time period. These swap rates are linked to yields on UK government bonds, which themselves are influenced by expectations for inflation and future interest rates.

Two- and three-year fixed rates are closely aligned to the market view of inflation. If inflation is expected to remain low, gilt yields and, in turn swap rates, will stay low and consumers benefit from cheap deals.

However, five- and ten-year fixed rates are aligned to expectations for the Bank of England base rate. If lenders think interest rates are going to rise, longer-term fixed rates will increase.

The two-year swap rate has risen from a low of 0.90% in mid-October to its current level of 1.03%. Three-, five- and 10-year swaps have followed a very similar pattern, with rates rising sharply this month.

When swap rates rise, lenders usually pass these additional costs onto consumers in the form of higher mortgage rates.

What is likely to happen to interest rates in 2016?

Earlier in the year, comments from the Bank of England suggested that interest rates would start to rise in early 2016. Since then, Mark Carney, the governor of the Bank of England, has said that rates might remain low for longer.

"If events mean … rate rises are not appropriate, then we will do the right thing and we will not adjust rates," he said.

The financial markets do not expect the base rate to rise from its record low of 0.5% until at least December 2016, thanks to low inflation and China's economic slowdown.

Should I fix my mortgage now?

If you're currently on a variable rate then most experts suggest that you won't see any change to your mortgage payments in the next year or so. Some predictions even suggest that the base rate won't rise until the spring of 2017 at the earliest.

However, the price of fixed-rate mortgages is determined by other factors such as swap rates and strong competition between lenders. Waiting for a rate rise is likely to mean you'll pay more for a fixed rate when you do decide to fix.

The cost of fixed rates remains historically low and so while rates are unlikely to rise in the short term, the peace of mind of guaranteed payments is certainly attractive to many borrowers.


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