It’s stayed the same for the 13th month in a row. The Bank of England’s base rate is like a stuck record. And that’s great news for anyone looking to take out a mortgage or current householders considering remortgaging.
After all, when the base rate is low, so are mortgage interest rates. As we write this, for instance, the interest on a 30-year fixed-rate mortgage is around 2.895%, the 15-year fixed-rate mortgage comes in at an average of 2.244%.
The big question on every potential and current householder’s lips though is, of course, how long will these low interest rates last?
There was talk last year in financial circles that interest rates may even drop in light of the recession brought about by coronavirus. But that notion is now on the backburner, thanks to the fact the furlough scheme has saved many more jobs than predicted and helped by the stamp duty holiday. It’s now at the stage where many economists are predicting the rates will go up – but when is the question.
Bank of England Bank Rate History - June 2011 to June 2021
The Bank of England’s monetary policy committee (MPC) meets every six weeks to decide on whether the base rate should go up, down, or remain the same. So, effectively it could be this year – although that’s unlikely, it seems. Coronavirus may not have had as bad an effect on the economy as initially thought, but it has still battered it.
A recovery period is necessary. Putting up interest rates at the moment could lead to inflation further down the line, and which is something definitely to be avoided, as far as the bank and economy is concerned.
Benefits of a fixed rate mortgage
So, now could be a good time to take out a fixed rate mortgage. It’s when you ‘lock in’ the current interest rate for a set number of years. That way, you can benefit from today’s low mortgage interest rates – even when the base rate and mortgage rates go up in the future.
The longer the period of your fixed rate mortgage, the more certainty you have. Typical periods for fixed rate mortgages are two years, five years and even ten years in some cases. It’s worth noting though that the longer the duration of the fixed period, the higher the interest rate.
At the end of your fixed rate period, provided you don’t sign up for another fixed rate deal then your mortgage will go on to whatever the typical interest rate is at that time - known as the lender’s standard variable rate (SVR).
Other benefits of a fixed rate mortgage include -
Your mortgage interest rate will remain static for the length of time you take out the mortgage for ie two years, five years etc. That means you know exactly how much you will be paying for your mortgage for years to come. You can budget for holidays, a new car etc knowing you’re not suddenly going to be forking out and extra £2,028(1) per year.
Sense of security
Even if your circumstances change unexpectedly, such as you lose your job or have an unplanned pregnancy, you don’t have to worry about your mortgage payments going up. At least that side of your finances stays the same.
Different lenders compete with each other to provide the best mortgage interest rates on the market. As a result, and if you know where to look, it’s possible to pick up some really good deals.
Downsides of a fixed rate mortgage
More expensive to set up
The longer the ‘grace’ period ie the length of time you fix the rate of your mortgage for, the more you will pay for the privilege in arrangement fees. But that’s understandable really because it’s the lender who is gambling here on the base rate not going up. If it does and your mortgage rate is fixed then the lender will be the one to lose out.
Early repayment fees
Tying yourself into the longest fixed rate deal you can afford isn’t always the best idea. That’s because if you want to leave early to take up another deal, or move to another area where there are better schools, for instance, then you will probably have to pay early settlement fees. This can run into thousands of pounds. In this situation, it’s definitely a good idea to speak to a mortgage broker.
No benefit if interest rates drop
If the Bank of England base rate goes down and mortgage interest rates fall as a result, you won’t benefit. That’s because your fixed interest rate stays the same regardless of whether the base rate goes up or down. On the plus side, they couldn’t really get much lower than they currently are.
Likelihood if interest rate rises
Usually interest rates drop when something major occurs. During the 2008 recession the interest rate went from 5% to 0.5%. After Brexit in 2016 it fell from 0.5% to 0.25%. In March 2020 there were two emergency cuts as a result of coronavirus.
Today though, things appear a little brighter. The successful vaccine roll out, together with the chancellor’s furlough scheme means the coronavirus crisis hasn’t damaged the economy as much as was predicted early on. Coupled with this is the establishment of some pretty good trade deals, meaning Brexit isn’t as hard-hitting as many expected.
The upshot is that it’s not beyond the realms of possibility that the interest rate will go up in the near future. Whether that is in 2022 or not until 2024 remains to be seen. One thing you can bank on though, is that interest rates will go up at a later date. It’s just a case of when. And, if – as someone who is intent on taking out a mortgage or remortgaging – you can get a good fixed rate deal organised before they do.
Before taking any action though, let us help you find the best deal, you can request a call back or book an appointment now.
Your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage.
(1)Based on research undertaken by TSB 2021