The era of record-low interest rates could be coming to an end. The Bank of England earlier this month signalled the base rate will soon rise and pricing in financial markets suggest there could be multiple increases during 2022.
The upward trend means increasing costs for those on variable interest rate mortgages and marks the end to the recent mortgage price war among some of the high street’s top lenders, who were offering sub-1% mortgages as they battled for market share.
With mortgage costs beginning to creep up, borrowers are starting to look hard at fixed rate options to lock in some certainty over what could be a volatile period. So, what are the pros and cons of fixing your rate?
Historically low rates: Even with the potential for rate rises they remain at near-historic lows. There is still competitiveness in the market and fixing now could provide certainty over your monthly payments for a set period of time and protect against further base rate rises.
Choice of two/five years: Typically, most lenders will offer you the alternative between fixing for two and five years, meaning you can still choose a fixed mortgage that suits your particular situation.
Certainty for first-time buyers: For first-time buyers, fixing can be a good idea in a rising interest rate market. It is unlikely first-time buyers will have had such a lengthy financial commitment before, so a fixed rate gives a guarantee over their monthly payments. The similarity to a fixed rental contract provides some certainty during what can be a stressful period.
Penalties for selling: If you’re fixing for five years, you need to be relatively certain you’ll be in the property for that period of time. Selling midway through the five-year period can incur heavy penalties, in particular an early repayment charge, which can be between 1% and 5% of the outstanding loan balance.
Higher costs later on: However, if you decide to take out a two-year fixed rate to give yourself some flexibility, you may find that the base rate has jumped significantly in that time and a new fixed rate mortgage will be inevitably more expensive.
Remortgaging fees: If you already have a mortgage, there can be also costs involved in remortgaging to move to a fixed rate, such as valuation fees, arrangement fees, legal fees and potentially broker fees.
Which option is right for you will depend on your circumstances. To weigh up your options, speak to one of expert brokers at Knight Frank Finance.