Now is the time to get fixed mortgage deals

by Neil Faulkner on 24 March 2010  |  12 comments
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Get a fixed mortgage deal now or you'll regret it later...

There is a certain split among borrowers looking at new mortgage deals at the moment. Plenty are attracted by the cheapness of variable deals, but there are also plenty of reasons to fix your mortgage now.

Today, I don't just want to look at short-term fixed rate deals - it's time to consider fixing your mortgage rate for a decade.

'Wait and pounce' argument doesn't hold up

A leading argument for sticking with your cheap variable rates now is that you should wait for rates to turn upwards then fix before they've climbed far. However, most people probably won't 'get in' quickly enough to do this.

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It's like stock-market investing: not everyone can buy at the bottom and most people miss it by a long way. With fixed mortgages, banks lend a pre-determined amount with each issue. If a demand rush swallows that in days, it won't be priced so cheaply next time.

What's more, lenders pre-empt the rush and can price in more margin.

The bottom line is, by the time the ship's tooted 'all aboard', it may already be miles from the shoreline. And that's why playing the waiting game is dangerous. Don't underestimate the speed at which expensive deals can replace cheaper ones when half the country wants in simultaneously.

The long-term average 'best' mortgage rate

My research indicates the absolute best mortgage rates for most of the past decade have been very close to the base rate, and that over the past 35 years the average base rate was around 8%. Over the past 15 years the average has been about 5%.

This means that if we average around 5% over the next ten years we will have done well in a historical context. To that end, it's worth comparing staying flexible against ten-year fixes.

What if you stay flexible?

Let's assume you're paying 3.5% in an SVR or short-term mortgage and that rates remain low for the next three years – just for my point's sake. (In reality, professional and amateur forecasting alike is consistently inaccurate, even when there's consensus.) You remortgage as rates then sprint to 6.5% for three years, and then remortgage again for another four years when they've fallen a little.

It'd be more bumpy than that, but you get the gist. Over ten years you've paid an average 5%:

A £125,000 property, re-mortgaging twice in 10 years

Rounding applies.

I've deliberately made that example conservative:

• I've used the average rate for the past 15 years, which is just 5%; if rates revert to the longer-term average of 35 years it'll be 8%.
• A 6.5% peak isn't high by any standards. It could easily get higher (before you're able to catch the ship).
• I've excluded arrangement fees, but there'd be two such payments.
• I've assumed you've managed to get the very best deals each time you remortgage.
• I've made the big assumption that, when rates rise, the 'spread' between the base rate and the best available mortgage rates will swiftly narrow again to virtually zero. Currently, the very best deal is around 1.85%, whereas the base rate is 1.35 percentage points lower at 0.5%. If the spread doesn't narrow as I've assumed then it'll cost more.

That's an example of what might happen if you choose today to remain flexible and the next ten years are 'average'.

Long-term fixed-deal comparison

Now I'll compare this with long-term fixed deals. In this environment, huge numbers of people shouldn't fix for just five years. That's too short (although in certain individual circumstances it'll make sense).

At present, I can find no fixed deals lasting longer than ten years when looking for mortgages with a 75% loan-to-value (LTV).

The best ten-year deals are currently very close to the long-term average, with Britannia and the Co-op under 5.3%. Here's how they compare with my previous example:

This shows that if you fix now at 5.3% you'd pay a bit more than in my extremely conservative first example where you've remained flexible. The trade-off is your repayments are certain, and compare well to the long-term average, very best mortgage rates.

Who's average?

I've made assumptions and used averages above, basing it on a £125,000, 20-year remortgage, a 25% deposit, assumed you're a 'good' customer, and that you're currently paying a 3.5% SVR.

Millions are paying in this region, but millions of others aren't. It also assumes that it's right for your personal circumstances to tie yourself into such a long deal. For many it won't be.

What have we learned?

This exercise won't tell you your best mortgage, as our circumstances are individual. You'll need a broker for that. This exercise is meant to make you think longer term and to plan ahead.

The best reason to fix is certainty of payments, as opposed to hoping to pay less. I would add that fixing long term now gives you certainty that you'll be paying a good rate by historical standards over the period.

And here's something to debate below: if you think we're pretty much near the bottom as far as rates are concerned, what better time is there to fix than now?

• Watch this video: Sort out your mortgage online!

Epilogue!

I can't leave without reminding you of a good alternative to fixing: overpaying. We've written about this many times before. You'll still need to ensure that you can meet payments when rates rise, which they will, and quite possibly by a lot.

Think long term. Plan for eventual higher rates. Don't think it's easy to catch the ship before it sails.