Panicking about variable rate mortgage

TEDDYRUKSPIN

Rocket? Nah. It will probably rise slightly over the two years but not as much as people will think. I can possible forecast that the BOE will not be more than 2.5% within two years. For one thing, 2010 - the government will try and sweet talk the population and then the hike by the end of the year. 2011 will see an increase.

But... they will just hike all taxes etc etc.

Vis05

heatherberry2009 wrote: »

I worked out that at £40 rise per % (as outlined in my mortgage agreement) I can afford it to go up 3% (therefore £120 more than I am paying currently) at a push 4% rise. After that I would possibly need to switch to interest only. I know it is hard to predict these things but I am sad to say I am a complete dunce when it comes to this sort of thing and I thought that it would be unlikely (again hoping more than knowledge - which is why I feel stupid right now) to rise more than this in 2 years. Then I read some comments here about possible steep rises like 7-8% in the next year (again I know this is not for certain and no one can know) BUT in your opinions is it likely that we could see a 3% rise in the next 2 years? Or am I giving myself a high blood pressure for something that is very unlikely?

Thanks for your replys, much appreciated

Good, you are starting to do your own maths on the thing. You should always do this & if you don't understand then ask someone. Just assuming everything will be OK is what gets so many people into trouble. A few minutes doing a few sums at the outset can save you a world of financial pain and heartache later. With any loan/mortgage if you can't afford to pay what the historical average rate has been (+ a couple of percent) then you are gambling in my view & if you "lose", being over-stretched can make your life a misery.

As it stands at 4.69% vs 5.99% (6.09%) over two years I would stay with the SVR. There are no guarantees that the rate won't go up, but I doubt it will go up by as much as would be needed to wipe out the difference in that time frame. The economy is still very weak, the last thing that's needed is a hike in interest rates.

Also you are in an "interesting" position vs the Bank of England rate. Your mortgage lender is making a fortune out of you because the current BoE base rate is 0.5% (which is what they are paying on the money they have lent you at 4.69%).

Historically that "gap" is close to double what would normally have been seen (i.e. say bank rate = 4%, mortgage rate = 6.0-6.5% so there is a much bigger "gap" between the BoE rate and your rate than would be normal.

You have no say in the matter & nor can you really argue much about it but it is clear that there could be fair size increase in the BoE rate before your rate really needed to go up. I'd say your lender was being a bit sharp if they hiked your rate as soon as the BoE rate goes up.

If they did it I'd be having a conversation along the lines of "be more reasonable or I'm off at the earliest opportunity". In the meantime don't worry about the SVR vs FR thing - where you are is OK for now.

For the long term you can use the following really simple observations to guess which way rates are going to go:

Fixed rates are always higher than the SVR - look at the gap between the two. If its larger than "normal" it indicates rates are likely to go up. They will not give you a fix close to the SVR when they think the SVR is going up.

Similarly, look at how many fxed rate deals there are in the market. When the lenders think rates are likely to come down you will find the market flooded with Fixed rate deals trying to lock customers in at existing higher rates.

Similarly when they think rates are going up those deals disappear overnight.

The lenders are playing the same game the customers are from the other end i.e. trying to lock you in and lock you in at the highest rate they can.

Finally, locking yourself into a fixed rate for "peace of mind" may potentially cost you a ton of money. If you are worried about rates going up then another approach is that while the SVR is lower, save the difference between what you pay and what you would pay on a fixed rate and tuck the money away somewhere (hopefully where it will earn you something - an ISA or similar). Then if rates go shooting up & you are struggling with your payments you can draw down on the fund you have created to cover at least some of the problem.

If you never need to draw down on it then so much the better but above all the fund remains yours and you can use it for something else if you want.

opinions4u

Fixed rates are always higher than the SVR

On the whole the post above is excellent. The word "always" in the sentence I picked out isn't accurate though. Usually, or often would be fairer.

Fixed rates have often been offered that are cheaper than SVRs over the past decade.

One_Day_Rodney

heatherberry2009

As probably mentioned above, you also have to factor in the mortgage reservation fee over such a short fixed term. If you mortgage is relatively low, then this cost plays more of a part.

A fixed mortgage reservation fee of £995 (typical) over two years is equivalent £41.50 / month over the term, which according to your borrowing calculations is a equivalent to a 1% increase in rates.

So your broker may have also factored this in when looking at the mortgages available to you.