Fixing Mortgages

For many people a mortgage is one of the biggest financial commitments they will ever make, which is why it’s so important to choose the right product for your, personal situation.  At this point in time, it’s very hard to find interest-only mortgages for residential properties (although they are still available in the buy-to-let sector), which means that for practical purposes, your choice of mortgage boils down to a tracker mortgage, an offset mortgage or a fixed-rate mortgage.

Tracker mortgages Tracker mortgages are pegged to the base rate set by the Bank of England and hence rise and fall in line with the decisions taken by the Monetary Policy Committee.  While this means that borrowers benefit from any reductions to the base rate, it also means that the responsibility for absorbing any increases lies with the borrower rather than the lender.  From a lender’s perspective, this makes tracker mortgages less risky than fixed-rate mortgages and hence they can offer them at a more affordable rate.

Offset mortgages Offset mortgages are a relatively new product in the UK and the basic idea behind them is that the borrower treats their mortgage rather like a current account with a huge overdraft facility.  By transferring their savings into the mortgage product borrowers reduce the balance of the loan and hence the amount of interest payable.  If need be, however, they can still access their money.  Given that interest rates paid to savers are typically lower than those charged to borrowers, the question of whether or not these mortgages are right for any given borrower usually relates less to interest rates themselves and more to whether or not such products fit in with a borrower’s overall financial plan.

Fixed-rate mortgages Both the Mortgage Market Review and the recent review of buy to let mortgages undertaken by the Prudential Regulation Authority emphasised the need for lenders to examine how potential borrowers would cope in the event of interest-rate rises.  The reason for this is obvious.  At this point in time, interest rates are so low that there is far more scope for them to go up than for them to go down.  Borrowers who are also thinking about this possibility might be tempted to take out a fixed-rate mortgage now so that they have confidence about what their repayments will be over the coming years.  While this may be an astute move in some cases, there are a few points to consider. Fixed-term mortgages tend to be more expensive than tracker mortgages.  In theory, interest rates can go up infinitely and if you have a fixed-rate mortgage, it’s the lender who has to absorb the cost of this, so while fixing your payments can bring a level of certainty and a feeling of security, this can come at a price. Longer-term fixed-rate mortgages tend to be particularly expensive.  This fact is a corollary of the previous point.  Basically, fixed-rate mortgages are a combination of a loan and an insurance policy.  The longer the term of the policy, the more the lender is exposed to the risk of interest-rate rises and hence the higher the price of the cover.

Exiting a fixed-rate mortgage early can lead to penalties Admittedly exiting any form of loan earlier than the lender expected can lead to penalties, particularly if the borrower is offered some kind of introductory deal, the cost of which needs to be recouped by the lender over the lifetime of the product, but given that the nature of fixed-rate mortgages is such that they are likely to attract people looking for a guarantee of stability, we feel it’s important to emphasise this point.  If borrowers are looking to fix their rate because they are concerned that they may be about to enter choppy financial waters, then it may be best to seek professional advice now to look at what options are open to you, rather than assuming that a fixed-rate mortgage will resolve the issues you may face.