When should brokers recommend fixed or variable products?
Only a short while ago the question of whether to choose a fixed or variable product was fairly straightforward, making life easy for brokers. However, back on December 17, 2021, the Bank of England’s Monetary Policy Committee began increasing the base rate – the start of a series of increases that has ultimately seen the base rate land at 5.25%.
Yet with the BoE now holding the rate at two successive meetings, can clients assume the “worst is over” and could it be time to place variable rates back on the table?
To fix or not to fix
Charles Breen (pictured), founder and director at Montgomery Financial, said choosing between a fixed or a variable rate is often a personal choice.
“I tell clients presently that choosing a fixed rate or variable is subjective to their risk tolerance, and that rates could rise further as likely as they are to fall,” he said.
While Breen believes we are over the worst of the rate increases, he said no-one truly knows the outlook. So, he added, the choice between fixed or variable should be decided based on whether the client has the capability to afford higher mortgage payments in a worst case scenario.
Currently, the vast majority of Breen’s clients are going with a fixed product over trackers as there is still too much uncertainty for many borrowers.
“People do not want to take the risk, many have been burnt during this interest rate cycle and they are keen to avoid it happening again,” he said.
That said, Breen added that as rate battles between lenders intensify, he believes this will spur confidence which will result in more customers choosing variable rates moving forward.
Stephen Perkins, managing director at Yellow Brick Mortgages, agreed with Breen that variable rates are more suitable for those who can afford potential rate rises, but he added that many are not willing to take on the risk currently.
While Perkins believes we have reached the peak of the interest rate cycle, following the Bank of England choosing to hold the base rate for the second consecutive time, he added that further rises cannot be ruled out.
He also expects declines in rates to be far slower than the journey upward we have seen over the last two years. The base rate rose 14 consecutive times before being held in September 2023, and the two consecutive holds of the bank rate have not been voted on unanimously.
“So, for most borrowers, fixed rates are the preferred option, which I believe is best for most clients right now, unless there is a requirement for no-tie-in flexibility making a variable option more suitable,” he said.
Are brokers advising variable products?
Denni Tyson, mortgage broker at Henchurch Lane Financial Services Currently, said it is important for homeowners to know of the various mortgages available.
For years, he said the industry has been quite linear concerning offering fixed rates as they have always been so low and the risk-averse option.
“However, due to interest rates having risen significantly for fixed products, borrowers began turning to alternative options, leading them to variable deals,” Tyson said.
Tyson has found that banks have reacted well by offering variable products with no penalties and the ability to switch.
“My recommendation for the majority of clients is to choose trackers over fixed products currently due to how high interest rates are; plus most individuals want flexibility, but only time will tell if it pays off,” he said.
Are you advising your clients to choose fixed rate products or variable deals? Let us know in the comment section below.
