Mortgages, should you fix or float?

Last year, the Bank of England’s decision to raise interest rates took the Monetary Policy Committee out of the financial pages and into the mainstream headlines.  Given that the raise took interest rates from 0.25% to 0.5%, it was hardly the sort of change to make savers jump for joy, but it was a warning flag for borrowers to make sure that they were on the best deal for their situation, or, more accurately, that their situation could be about to change and that they might need to be ready to adapt to that. From ultra-low rates and quantitative easing to…? From July 2007 to November 2017, the only way was down for UK interest rates.  The steepest drop came in the wake of the 2008 financial crisis, which saw interest rates plummet from just over 5% to 0.5% where they stayed until August 2016, when they were cut to 0.25% during the aftermath of the Brexit vote.  In short, therefore, last year’s rate rise has simply brought interest rates back to where they had been for near enough the past 10 years and nowhere remotely close to the levels seen before the 2008 financial crisis, let alone the sort of levels seen in parts of the 1970s and 1980s.  On the other hand, the fact that the Bank of England did raise interest rates was a reminder that it could and while interest rates have a natural floor (at 0% although, in theory at least, negative interest rates are a possibility and have been used in other countries), but positive interest rates can be raised indefinitely (again, in theory at least).  It all depends on the UK’s economic performance as measured through inflation. Interest rates and inflation The Bank of England (specifically its Monetary Policy Committee) is charged with keeping inflation at precisely 2%, however, it is accepted that inflation may move up to 1% in either direction.  If inflation goes below 1% or above 3%, the Bank of England is required to write an open letter to the Chancellor to explain why and what it intends to do about it.  The question, therefore, is less “what will the Bank of England decide to do” but “what will economic circumstances oblige the Bank of England to do”?  If inflation drops below 1% the Bank of England can opt to lower interest rates again and/or to use quantitative easing, however if it goes above 3% then it is difficult to see how the Bank of England can avoid raising interest rates, however this does not necessarily mean that mortgage-holders should take this as a sign to switch to a fixed-rate deal as soon as possible. Fixed rates can come at a price The first point to remember is that there will probably be some degree of cost involved in making any change to your current mortgage arrangements.  It is, therefore, important to do your sums carefully and make sure that the up-front costs are outweighed by the longer-term savings.  The second point to remember is that fixed-rate mortgages are, essentially, a means of “going long” on interest rates and locking in a deal at lower rates in the expectation that they will rise in future.  Lenders, however, will take into account the possibility of future interest-rate rises when they price the deals they offer and, as commercial organisations, accountable to their shareholders, they will aim to ensure that they turn in a profit even if interest rates go up.  Hence fixed-rate deals may not necessarily work out to be the cheapest option or at least not by much.  What they do offer, however, is certainty, since they ensure that mortgage repayments remain the same from one month to the next over the term of the fixed-rate deal and some people may find this certainty worth the money. Your home may be repossessed if you do not keep up repayments on your mortgage.