Picking the right time to switch from a ‘floating' mortgage rate (a tracker, SVR or rate linked to SVR) to a fixed rate has often been tricky, but as mortgage borrowers find themselves in increasingly unchartered territory, making the right choice about when to fix and how long for is even more challenging than ever. Ray Boulger of John Charcol, the UK's leading independent mortgage adviser, says however that one thing is certain, "What's right for one borrower won't necessarily be right for another. While there are several market factors which will influence everyone's decision, there are others that will affect borrowers in different ways and all must be taken into consideration."
Factors impacting everyone
Economic deterioration: No-one is able to predict at the moment how much further the economy will deteriorate and how long the UK will remain in recession - but it is safe to say that the worse it gets and the longer it lasts, the lower interest rates will go (for longer) meaning that short term fixed rates are also likely to fall further
Qualitative easing: If the Bank of England chooses to go further down this route, it will have to sell more gilts - risking indigestion in the gilt market. Buying long dated securities should push swap rates down, but if the market baulks at funding the increased number of gilts, yields might have to rise to enable this.
Deflation and interest rates: With the noble exception of David Blanchflower, the MPC was behind the curve when rates needed to fall and there is a risk that if the UK enters a period of deflation, Bank Rate may be kept too low, for too long. This could result in CPI inflation exceeding the 2% target, thus increasing interest rates more sharply in the end.
No one remedy for all - but 2 year fixes won't work for many
Boulger says, "With so many market uncertainties, it would be wrong to be too prescriptive on what borrowers should do. However I would say that for most people, taking a two year fixed rate now will probably be a mistake as that this would mean having to review their mortgage deal again when rates may still be rising, and almost certainly won't have fallen back again. If rates are still rising in two years, fixed rate deals are unlikely to be compelling and the alternative of being on a floating rate in a rising interest rate environment will be equally unappealing.
High LTV? Long term fix
Boulger continues, "Anyone who currently needs to borrow close to 90% of their property value must bear in mind that in two years time, depending on how much further property prices fall and whether there are more lenders offering mortgages at high loan to values, they may well find that they can't remortgage and will have no option but to stay with their existing lender. While some lenders such as Halifax and Nationwide are now offering existing customers new deals up to 95% LTV, most are not and while the situation may have improved by then, it is safer to assume it won't. Therefore, despite limited availability and high rates, anyone needing to borrow around 90% LTV should look for a longer term fixed rate before their property value declines any further, unless they are happy to stay on their current floating rate until the market recovers, by which time interest rates will probably have risen.
Moving house? Make sure you can take it with you
Boulger says, "Anyone planning to move house in the near future should be careful about locking into a deal, fixed or tracker, with early repayment charges (ERCs) beyond when they plan to move. Although most mortgages with ERCs are portable, with lenders still tightening criteria there is no guarantee that a portable mortgage will in practice be portable because the lender's criteria may mean an individual borrower doesn't qualify for the loan required with that particular lender."
Get a droplock - and no collar - if you can
Boulger says, "When switching from a tracker to a longer term fix, some borrowers will struggle psychologically with the fact that they will have to accept an increase in their interest rate, and also probably pay significantly more than for a 2 year fixed rate. A tracker with a droplock option but no collar will offer borrowers who want a new mortgage deal now but want to defer fixing until later the ideal solution of staying on a floating rate until they feel the time is right to switch. Furthermore those with lifetime trackers at only a small margin above Bank Rate, say less than 0.5%, will need to think very carefully about the pros and cons of giving up a mortgage with such a skinny margin above Bank Rate, bearing in mind that such deals are unlikely to be available again for very many years, if ever.
And in conclusion?
"Despite all this uncertainly I believe it will be right for most borrowers to switch to a longer term fixed rate, say 5 years or more, sometime this year, and for some sooner rather than later. For specific individual advice borrowers should speak to an independent or whole of market mortgage adviser."
