Fixing your mortgage rate now could be a smart move

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The Independent Online

Interest rates are expected to be left at 0.5 per cent when the Bank of England's interest-rate setting committee meets tomorrow, but a rise in rates may not be far off. Warnings that rates could climb as high as 8 per cent in the next two years look like alarmist nonsense, but most experts are now predicting a climb by next spring.

That leaves borrowers in a quandary: should you fix now ahead of an expected rise in rates, or wait to see what happens in the next few months? There are some decent deals around over two and three years but fixing on to a higher rate before you need to could prove a costly mistake, especially as most needs come with expensive redemption penalties.

On the other hand, fixing your mortgage to an affordable level can help with budgeting and financial planning, meaning you won't be in line for a payment shock when rates rise. Bearing that in mind, it's an idea to compare what savings you can make by switching to a new mortgage now.

If you have been on a deal that has now expired then switching to a lender's standard variable rate may have been worthwhile in recent months while the interest rate has remained at record lows. But if rates are raised by the Bank of England, variable rates will follow upwards instantly.

The current swathe of reasonably attractive fixed rates will then disappear to be replaced by higher-rate deals. It means that while fixing now could mean moving to a higher rate in the short term, in the long term it could work out to be a wise move.

If you are thinking about remortgaging then you could, of course, consider trackers or capped rates as well as fixed deals. But don't get sucked in by a low headline rate. A tracker, for instance, is likely to be lower than a fixed-rate at the moment, but may not be within a few months.

Whichever you choose is a gamble. For instance, if you decide to get a fixed-rate mortgage and interest rates remain at their low levels, you could be saddled with what proves to be an unattractive rate. Choose a tracker and you could soon see it start climbing. Once rates start going up it's possible that they could climb back to the levels of 4-5 per cent of just two years ago.

With trackers at 2-3 per cent above base rates, a tracker mortgage could quickly be at 6-8 per cent, which could leave many people facing a massive rise in their monthly mortgage bill. That doesn't mean you should rush to fix. It's important to weigh up your view of the future of interest rates and make a decision based on what you think may happen. No one has a crystal ball which will accurately predict future interest rate movements and so no one else can tell you what will be your best move.

It is also important to bear in mind that there are several costs involved in remortgaging. Your existing lender may charge a penalty for leaving early if you are on a deal and a new lender will charge an arrangement fee – which can be £1,000 or more – and there are likely to be fresh valuation and other costs if you switch lenders. For that reason it's well worth considering your existing lender to see what they can offer you.

If your aim in remortgaging is to save money then you should think about increasing payments or reducing the length of the loan. Either tactic will cut the amount of interest you are being charged which could mean saving thousands over the live of the mortgage.

For example, if you had a 25-year mortgage of £100,000 with an interest rate of 3.99 per cent and you were able to remortgage to a rate of 1.99 per cent your monthly payments of £523 would fall to £423. If you then continued to pay the original amount of £523 this would actually save you more than £8,700 by reducing your mortgage term by three and a half years.

What to do next

Research is important. Look into the deals offered by different lenders before you make a decision. It could well be worth seeking independent financial advice to talk through your options, although even the most clued-up expert won't be able to tell you for certain what will happen to interest rates.

Check the small print in your existing mortgage to see what fees or charges there may be if you decide to end the mortgage prematurely. Ensure you include all charges when calculating whether it will be worthwhile remortgaging – it should improve your financial situation, not worsen it.

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