For anyone having to take a decision about a mortgage now, it will be a really important and a really difficult decision.
Recently, a friend who runs a mortgage broking business asked me what he should do about his mortgage – two or five-year fixed? Variable rate or tracker? In nearly 30 years in retail financial services friends occasionally ask me what they should do. This is one of those occasions.
In 2007, the financial system had the equivalent of a heart attack. To keep things pumping, central banks administered the very powerful drug of low interest rates. Governments, companies and individuals have become addicted – mortgages, car loans, unsecured debt has been addictively cheap. They’ve never experienced anything else.
Rate rises
That has all changed over the past 12 months as inflation has taken hold. The Bank of England has been forced to raise interest rates to bring down inflation. Raising interest rates reduces inflation by sucking money out of peoples’ pockets. The whole point of doing it is that it is unpleasant economically.
The BoE has been trying to do it gradually, in a number of small or medium-sized steps, so that we are weaned off slowly. Unfortunately, and as we know, the September 2022 "mini" Budget blew that out of the water.
Future interest rates are allied to the BoE bank rate that fixed rate mortgages are priced off and they rose dramatically and were very volatile. Since the autumn they have fallen and stabilised. They are still forecast to rise further but then to start falling later this year. But the uncertainty remains.
No one actually knows now what the 'right' thing to do is. We will only know that in five to 10 years’ time, with the supreme benefit of hindsight.This matters to the average person thinking about what to do with their mortgage. This is the difficult bit. Normally more than 90 per cent of people take a fixed rate mortgage, usually for two or five years.
This gives the certainty of knowing what your monthly mortgage payment will be for that period, though if you want to get out of the deal you usually have to pay an early repayment charge. The alternative is a variable rate mortgage, which generally goes up and down with the bank rate.
Usually, the longer you borrow money for, the higher the interest rate – the lender has your money locked up for longer. Currently borrowing money for two years costs more than for five, which itself costs more than for 10. The best buy tables also tell us that variable rate mortgages, priced off today’s bank rate, cost less than fixed rate mortgages.
Why? Because there is an expectation that rates will continue to rise. And as the bank rate rises, the monthly payments on your variable rate mortgage will rise. But if you can live with that for a while then, in time, you may then be able to get a fixed rate mortgage for less that it would cost today.
Or you could fix your mortgage for two years, knowing that you can afford that, and then get a 10-year fixed mortgage when/if rates start to fall in two years’ time. That is what my friend, the mortgage broker, was thinking of doing.
Do not agonise over trying to beat the market, you may get lucky and you may not.Everyone’s position is different. For a lucky few the mortgage payment even at much higher rates will be a comfortable part of their monthly outgoings. For others, unexpectedly high payments may be a stretch. Many will be somewhere in between.
So do not agonise over trying to beat the market, you may get lucky and you may not. No one actually knows now what the 'right' thing to do is. We will only know that in five to 10 years’ time, with the supreme benefit of hindsight.
I said to my friend that he needs to balance his desire to pay the least with the value of having the certainty that he can afford his mortgage.
If he can take a five or 10-year fixed mortgage today, that he can afford, he has peace of mind. If he takes a variable rate mortgage for a period, and then gets a fixed rate mortgage, he may end up paying less overall. But rates may rise further and longer than expected and when he looks to fix his mortgage, he may no longer be able to afford it.
People who need to answer this question find themselves in a casino, playing Black Jack. Do you stick or twist?
Mark Bogard is chief executive of the Family Building Society
