Got a question about mortgages? Email in and we’ll get one of our experts to reply. Andrew Montlake, a mortgage broker with Coreco, has given his advice to a reader below. If you have a question for our experts, email us at [email protected].
I fear I have mortgage rate anxiety. I am about to remortgage (I have a loan worth £230,000 and my broker is suggesting a two-year fixed loan at a rate of 4.31 per cent) but I’m gripped by fear that we are making the wrong decision and rates will plummet. Hearing Jeremy Hunt saying in the Budget that inflation would fall to 2.9 per cent by the end of the year has intensified this. What should I do? L.R., London
Andrew replies: This is the question on the lips of many of our clients at present who are approaching the end of their existing mortgage product and looking at what to do next.
Despite fears that inflation was going to drop, it has actually increased to 10.4 per cent this week alongside interest rates increasing to 4.25 per cent on Thursday. While this may alleviate your fears somewhat, there are still predictions they could be nearing the top with some believing both are likely to fall in the coming months.
The answer for you is to look at things completely differently and decide what is right and affordable for you now, with the information you have available and your immediate future plans.
You will only know with hindsight whether your decision was the best it could have been, but even if it proves to be that you would have been slightly better off taking a different decision, that does not mean that your choice at the time was not the right one for you.
I was lucky enough to be on the excellent Martin Lewis Money Show a few weeks back, and he explained this process brilliantly. If I took a coin and offered you a bet where if I flip the coin and it lands on heads you give me £1, and if it’s tails I give you £100, you would say that was a good bet. If it lands on tails and you now owe me £1, that does not mean that the overall decision was not a good one, even though the outcome was not what you wanted.
At the moment, even the “experts”, (you may say especially the experts), do not know what is going to happen next.
Take the events of the last couple of weeks, let alone the extraordinary events of the last year. A few weeks ago swap rates, (the future cost of money upon which many lenders base their fixed rates on), fell on the expectation that we had reached the top of the current rate rises.
A week later they then rose by around 0.5 per cent due to a range of things such as stronger than expected economic data both here and in the US, wage inflation, higher car sales, continued low unemployment, bullish sounds from US rate setters and the belief that inflation may stay higher for longer than expected.
Then last week, out of nowhere, came a banking drama, with Silicon Valley Bank and Signature Bank in the US, then the mighty Credit Suisse facing issues that required intervention. There was a real fear that contagion from these events could affect the wider banking and lending community and swap rates fell back down again.
Leading central banks have acted quickly, but the question is will the action taken be enough to calm and quell the tide, or are more issues simmering and waiting to boil over.
Fast-forward to this week however, and the surprise rise in inflation to 10.4 per cent when every expert expected it to drop below 10 per cent caught everyone by surprise. What has happened? Yes, you guessed it, now there is more pressure on banks to increase rates again and swap rates have risen again.
The next day the Bank of England decided to increase rates to 4.25 per cent, an increase of 0.25 percentage points, in hopes of quelling rising inflation.
Whilst a week is a long time in politics, it seems a weekend is an aeon in the financial markets.
In other words, anyone waiting to see interest rates get suddenly much cheaper before buying or remortgaging could win slightly or end up disappointed and even face a slightly higher rate. It shows how trying to call the market is fraught with danger.
With the Bank now facing an extraordinary balancing act, whilst I believe strongly they should now be pausing rate increases, this rollercoaster could continue for some time yet.
Whilst we have seen a couple of lenders cut rates already, this could be temporary and unless there really are some serious issues, we don’t expect rates to fall dramatically.
Locking in sooner rather than later as a safety net is still good advice, and a good broker will always be able to switch to a better rate if it comes along before completion.
The decision making process for yourself is therefore the same as it always has been and comes down to your attitude towards interest rate risk, and how much security you want.
If you are happy to be more flexible, believe that rates will fall again, and could cope if things go wrong and interest rates rise a bit, then potentially a tracker rate with no early repayment charges could be an option. Although it should be noted that these now start at 4.37 per cent now the Bank of England has increased rates by 0.25 per cent.
To “win” over a fixed rate therefore, you would need rates to come down relatively quickly, which may not be likely.
If, however, you do need an element of certainty with your payments and do not want any risk, then a fixed rate would still be a better option. If it is affordable then there is no point having sleepless nights before every interest rate decision and stressing if you cannot take some risk.
Look at a fixed rate as an insurance policy for peace of mind that you may have to pay a premium for. Only hindsight will tell you if that premium was worth it in monetary terms, but I bet it would be in stress and sweat terms.
Whilst we are looking at security, a five-year fixed rate could now be obtained at 3.94 per cent, which could mean you happily sail through the next five years with an affordable mortgage and without an interest rate care in the world.
But let’s get one thing straight. Unless there is a serious banking issue or another calamitous event, interest rates will not go back down to the rates we have seen over the last ten years, probably for a generation. A bank Base Rate of around 3.5 to 4.5 per cent is much more “normal”.
So whilst there is scope for rates to fall a touch in the next year or so as inflation does inevitably fall, it may not be as quick or as much as we think.
The answer, therefore, is to do what feels right for you now and don’t worry about whether your decision was right or wrong. If we all knew which way our decisions would go we would all be millionaires and not need a mortgage at all.