To fix or not to fix.......that is the question

n0438

Evening...

Our mortgage is approximately £135,000 give or take and we are on a tracker of 0.95% above Base rate i.e. 1.45%.

Due to out circumstances we are able to roughly pay double the monthly repayments as we budgeted for a fixed rate that ended nearly 2 years ago and we've kept the monthly payment the same.

During a dinner party the other week, the topic of conversation was mortgages.....lots of people were fixing their rates due to the possible rate increase.

I'm inclined not to as the rates we could get are about 4% but have a £1000 arrangement fee which is shocking.

Are we being too risky by not fixing or what would you do?

I've thought about it and the rate will have to go up a lot for the fixed rates we could get to be a saving as it were.

Your thoughts are appreciated - thanks :-)

Yorkie1

Only you know your attitude to risk and at what point your repayments would become unaffordable.

Nobody knows the speed with which interest rates will go up, but common thoughts on here tend to suggest that they are unlikely to be above 2% or thereabouts by the end of this calendar year.

Your rate is very good and I would personally think very long and hard before relinquishing it. You'll never get such a good deal again.

Biffins

Fixing your mortgage is like paying an insurance premium for the guarantee that you are protected from catastrophe. That's the best way to think about it.

And there IS a premium.

Let's talk some real numbers here.

As you said, you can get a 4% Fixed Rate (probably 80% LTV?) with a £1,000 arrangement fee. You are currently on a 0.95% above Base Rate tracker. Let me explain to you quickly why it would be stupid to switch.

First of all the best way to judge where interest rates will be after X amount of time is see what the market expects them to be. Don't listen to you friends about it, don't listen to estate agents or brokers about it, and don't listen to even people on this forum. That's just my personal opinion, obviously others may disagree. IMO just see the market rate. Here it is.

w ww.mortgagesforbusiness.co.uk/content/LandlordInformationZone/MoneyMarkets.aspx

UK Swap Rate :-

1 Year :- 1.18% (-0.03%)
2 Year :- 1.87% (-0.05%)
3 Year :- 2.30% (-0.07%)
5 Year :- 2.94% (-0.08%)
7 Year :- 3.39% (-0.06%)
10 Year:- 3.79% (-0.06%)

These are the BoE swap rates. These are the rates that banks can agree to forward contracts for now. Simplest way to think about it is that you can agree at no cost today, to agree to a deal at a certain rate 1, or 2, or 3 or 5 etc years from today. Basically it's where the market expects the rates to be this many years from now.

Now lenders charge you a certain amount margin above the BoE rate when they lend to you so that they can make money for themselves. This partly depends on your perceived risk, which has a number of factors including the LTV, your mortgage to income ratio, your credit rating etc.

Lets assume that you are at 75% LTV since you are saying 4% Fixed Rate. At 75% LTV you can get Tracker Rates at 2.6%. With BoE rate at 0.5%, the lender is charging 2.1% above it (the lender borrows from the BoE at 0.5%) to be profitable on your profile. Now why would the lender charge you 4% on a Fixed Rate. The reason is that these banks and lenders don't want to take interest risk themselves either. You have passed the risk of interest rates changing to the banks/lenders by getting a fixed rate. They will go sell that risk in the market. They go buy a 2 year forward contract so they can remove themselves of that risk. They can buy that 2 year forward contract at 1.87% at today's rate. Now they can add that 2.1% that they need to charge you to be profitable on top of that and 1.87% + 2.1% gives you about 4%. IT ALL MAKES SENSE.

This is also why the same lender will likely quote you a 5 year rate at 5.1%. He buys a 5 year forward contract for 2.94%, adds in the 2.1% margin for himself to be profitable, and voila, 5.1%.

Note that the lenders themselves fix THEMSELVES on these 2 year or 5 year contracts as well. This is the reason that ALL fixed contracts in the market have heavy fines and penalties for early repayment. The lenders are exposed to interest rate risk because they have already entered into forward swap contracts. They don't want you to pay all your amount early.

Now think about your situation. You are currently 0.95% above Base Rate. The market expects BoE Base Rate to be 1.2% 1 year from now and 1.9% 2 years from now. Suppose it rises linearly throughout, your average rate for first year will be 1.6% for first year and 2.4% for second year. Why would you rather pay 4% throughout instead?

Again the caveat is that the market could be wrong. Interest rates COULD rise faster than the market expects. THEN it's all about whether you want to pay that insurance premium or not if the rates do rise. More than half the mortgages in UK are fixed. It's clear that most people want to and are happy to pay that insurance. They dont mind paying extra as long as they have the peace of mind that the number won't change. What is that peace of mind worth to you? That's the question.

I personally would never advocate fixed mortgages to anyone unless your payment profile was so precarious that a slight unfavourable variation of BoE rates from the market expectation (via forward swap rates) would cause a big dip in your finances. Then again I know I am in the minority in that case. I just like paying less interest overall and can manage my finances otherwise myself. I don't need the "peace of mind".

In the long run you will ALWAYS pay less interest with variable mortgages. The reason is clear. You don't pay the implied insurance premium built in. If interest rates are low now, well, then variable rates will be super-low. It doesn't make the case of getting fixed any stronger than in any other interest environment. Sometimes the actual market rate will be higher than the expected via the forward swap and sometimes lower, but in the long run, the market is not consistently biased in any direction or there will be arbitrage.

That's my 2 cents.

getmore4less

With a Base+0.95% I would stick with it and save rather than overpay, you can easy get 2% net(20% tax) so get more interest that you save by overpaying.

Savings rates will likely go up when rates go up so you keep the savings till mortgage rates go above savings.


Since you can afford a significant rise in rates there is no need to fix, with that buufer AND the savings buffer you can build up you will be ok on paying.

horngkai

I'm in pretty much the same situation in that I am on a tracker +0.89% BoE rate. Was thinking whether I need to switch to a fix but after long and hard thoughts, there are no good reason to do so. Arrangement fees are too high currently and to get a good fix rate, the required LTV are too low for me. If the BoE rate goes back to the normal rate of 5% (as they have always implies this is the norm), it would be slightly higher than the current best fix rate but still not disastrous. How long it will take before interest rates goes to that level is anyone guess, but from the current climate, probably not in the next 5 years at least.

I agree with getmore4less in terms of overpaying as well. With such a low tracker, savings actually pays more than overpayment. Especially if you max out your ISA on the best rate account. If mortgage rate overshoot savings rate, you can always pay in the whole lumpsump and bring the rate down then.

Gorgeous_George

There may be another option.

Maybe you could keep your current deal but reduce the amount outstanding by taking a second, fixed-rate mortgage. How you split it depends on your appetite for risk.

I am in a similar position (albeit slightly lower margins) but I am happy to take my chances. If rates get to a level that I cannot cope with, there will be so many families in difficulty. The likely rioting on the streets will be so serious that my mortgage rate will be the least of my worries.

GG

ellives

what a fantastic first contribution Biffins - good job.

n0438

Thank you to everyone who replied - some fab comments have been made.

I'm going to stick it out and am now going to consider saving the overpayments we make.

Thank again everyone.

Peelerfart

ellives wrote: »

what a fantastic first contribution Biffins - good job.

agreed, pity we can't say the same for sozluk1szlk who seems to have a history of pointless posts.