Which is better: fixed rate or flexibility?

Knowing your costs each month can be a boon, but you are gambling on future changes
Click to follow
The Independent Online

If you were to ask Britons what are their three financial headaches of the moment, escalating energy bills, abysmal rates on savings and keeping up with mortgage repayments would likely feature at the top or near the top of the list.

However, there is the option with all of these key financial areas to introduce some certainty by fixing energy bills, mortgage rates and your returns on cash. But, just because you can does that mean you should, or is it better to stay flexible and wait for less troubled times?

Energy

Since October the UK has seen two rounds of price hikes on energy bills, with prices likely to rise in the long term as demand for oil grows in Asia's developing economies. This is inevitably going to have an impact on consumers, who have to decide to go for a fixed-rate price plan or remain floating until the prices drop.

"We've already seen fuel prices are having a huge effect, with consumers facing huge problems," says Jo Ganly from uSwitch. Those hit the worst are pensioners and single-parent families, although nobody is immune. "Fuel poverty [where households spend more than 10 per cent of income on energy] used to be seen as a working-class thing, but the demographic is changing and spreading into the middle classes as well," said Ms Ganly.

Initially it might seem that paying for a flexible energy plan is cheaper as you don't have to pay a premium and prices may go down. However, Mark Todd from Energy Helpline says: "Flexible energy rates are cheap for about six months or so and then you'll see a rise of 5 to 10 per cent in the first year. Over a couple of years fixed-rate prices often work out the best. They do often come with a premium, but at £50 to £100 it's a price worth paying for a stable rate."

Signing up to a fixed-rate energy price plan will guarantee that you pay that price for the length of your plan. This could work out to be a risky decision if prices drop significantly, but says Ms Ganly: "If you take out a fixed-rate energy plan and prices do eventually go down, they're unlikely to go as low as they were before the price hikes, so it's still a good option."

Eye-catching deals

Fixed Rate

EDF Energy has not yet followed other suppliers in introducing a second price hike, and its fixed-price deal guarantees you no price prices until 2014.

Flexible Rate

The dual fuel British Gas WebSaver12 offers a discount of 6 per cent on tier two rates, up to and including September 2012.

Decision: Fix

Mortgages

Despite the euro crisis, UK banks are still lending to each other and at a low rate. This means that fixed-rate mortgage deals have been falling in cost. One of the attractions of a fixed-rate mortgage is the security of knowing how much your monthly mortgage repayments will be.

However, it's not without risks. David Hollingworth of London and Country says: "You don't know what will happen with interest rates. It may not be the cheapest mortgage option in a few years, but you're tied into a fixed-rate mortgage through early repayment charges."

On whether consumers should go for a fixed-rate or variable mortgage, Ray Boulger, from the brokers John Charcol, says: "It does depend on the psychology of the borrower. If they want a fixed-rate mortgage for peace of mind, now is a good time to fix, although the other option is a variable hybrid deal." These combine a variable mortgage with a fixed-rate one.

In particular, Mr Boulger and Mr Hollingworth recommend the five-year hybrid deal from Accord which charges a variable rate of Bank of England base rate plus 1.69 per cent for two years and converts to a fixed rate of 3.64 per cent for the last three years.

"As the rates are fixed at the outset, consumers can hedge their bets," says Mr Hollingworth.

Current deals

The Hybrid

Accord, Yorkshire building society offer a two-year tracker period starting from base rate plus 1.69 per cent and a three-year fixed rate period from 3.4 per cent. Available up to 85 per cent and carries a £1,995 fee.

The Fixed Rate

Coventry offers a five-year 3.49 per cent fixed rate, followed by a Privilege Rate for the remainder of the mortgage with the current applied rate of 4.49 per cent.

Decision: Flexible

Savings Accounts

Base rate is at a low of 0.5 per cent. But where's the best place to put your money? David Black from Defaqto says: "First of all, use your ISA allowance." This allows you to save without paying any tax, so make sure you use your full ISA limit which is £10,680 in stocks and shares, or £5,340 in a cash ISA and £5,340 in stocks and shares.

Michelle Slade of Moneyfacts adds: "Five-year fixed deals are good if you want a no-access account. If you think you're going to need to dip into your savings at some point, it's probably a sensible idea to get an easy-access account, as you'll have the flexibility to take money out when you need to."

The differences in rates paid for fixed and flexible rate are pretty small. "You can get a one-year fixed-rate account with an interest rate of 3.51 per cent with United National," says Mr Black. "But on the other hand you can get a variable rate of 3.15 per cent with Coventry building society, so it's a good idea to consider how much the difference is worth and evaluate your situation. Most people will probably not be impressed by the premium paid for fixing."

Longer fixes have an extra risk. "By taking out a long-term fixed-rate savings accounts over three years or more, you're taking a gamble on rates staying low for a long period," adds Ms Slade. "You could lose out if interest rates recover."

Eye-catching deals

Easy Access

Coventry pays 3.15 per cent AER, plus a year's 1.15 per cent bonus. You can make four withdrawals a year.

Fixed Rate

The Bank of Ireland pays 4 per cent AER for a fixed two-year deal. You can save a minimum of £500 and a maximum of £2m.

Decision: Flexible

Looking for credit card or current account deals? Search here

Comments