"Opting for a two-year fixed term can give you immediate stability, especially if you plan to live in your home for a short time and you’re not ready to commit to a long-term deal"
- Pete Mugleston - Online Mortgage Advisor
The future of interest rates
As economic conditions evolve, with changes in inflation and central bank policy, the future trajectory of mortgage interest rates remains uncertain. Borrowers should consider their financial circumstances and consult with mortgage advisers to make informed decisions about mortgage financing in a low-interest-rate environment.
As we progress through 2024, there are promising signs that mortgage rates will gradually decrease, offering a favourable opportunity for those contemplating home purchases. Currently, we observe two-year fixed mortgage rates hovering around 5.95% and five-year fixed rates at approximately 5.57%, showing a decline from previous rates of 6.85% and 6.37% respectively.
This reduction in rates can be attributed to a 3% decrease in inflation this year. While further declines in inflation could lead to even lower mortgage rates in the upcoming months, it's unlikely that we'll see a return to the exceptionally low rates seen previously. It's anticipated that rates may not dip below 4% until the latter part of 2024 or beyond.
What is a fixed-rate mortgage?
A fixed-rate mortgage maintains a consistent interest rate throughout the term of your mortgage agreement. This stability offers financial predictability as buyers will know precisely what their monthly payments will be over the duration of the deal. This type of mortgage can be advantageous for budgeting purposes, providing buyers with a clear understanding of their financial obligations each month.
Fixed-rate mortgages are favoured by homeowners for their convenience and stability, but it's important to weigh up the pros and cons against other options before committing. Should you need to modify or pay off your mortgage prematurely while still within the fixed period, substantial fees will apply. These fees are typically proportional to the amount borrowed and remaining owed and given that fixed terms occur at the outset of your mortgage, the proportion can be significant.
How long should I fix my mortgage for?
You have the flexibility to choose a fixed-rate mortgage term ranging from one to 10 years, with two-year and five-year options being the most popular right now. Which one suits you depends on your personal circumstances.
Opting for a two-year fixed term can give you immediate stability, especially if you plan to live in your home for a short time and you’re not ready to commit to a long-term deal. Also, over the two-year period, interest rates may decrease which you’re able to explore as soon as your current deal ends.
If you prioritise stability over a longer duration, a five-year fixed term may be more suitable, especially if you intend to remain in your property for an extended period. If you expect to remortgage within the next five years, opting for a longer fixed term could lead to substantial exit fees, cancelling out any potential savings from the fixed-rate deal.
Longer-term mortgages often carry higher interest rates, as lenders must safeguard against market uncertainty over a prolonged period. This higher risk is evident in the elevated interest rates compared to shorter-term options.
It’s important to acknowledge choosing a fixed rate means forfeiting the opportunity to capitalise on favourable market fluctuations. If interest rates decrease, you may end up with a higher rate compared to other mortgage options available.
One more thing to consider when looking to pay your mortgage off early is the potential early repayment charge. This is a fee your lender can charge you for paying off the mortgage earlier than expected, as they’ll no longer be earning monthly interest from you, and typically applies to most fixed-rate and discounted-rate mortgage deals over a specific term, typically two, three or five years.
The ERC works on a sliding scale, for example, if you’re on a five-year fixed-rate mortgage, the highest ERC will apply within the first year, steadily reducing throughout the term. Tracker mortgages don’t tend to have an ERC, but there could be instances where this also applies.
Are there alternatives?
If early repayment penalties concern you, or if you anticipate relocating within the next year or two, exploring different mortgage options is advisable. For instance, variable mortgages are tied to market interest rates. While this means your monthly payments may fluctuate, you have the potential to save considerable sums on interest compared to a fixed-term arrangement if market rates decrease.
You could also consider exploring the Shared Ownership Scheme. This initiative enables you to acquire a 25-75% share of a leasehold property and subsequently pay rent for the remaining portion. This scheme requires a smaller deposit as it’s based on the share value rather than the full value of the property.
