Should you choose a fixed rate or variable mortgage?

Bank of England interest rates have now been held at a record low of 0.5% for five years, coincidentally the length of time that many homeowners choose to fix their mortgages for. If you opted to accept a fixed rate mortgage in 2009-10, you may be feeling that given the persistent low interest rates, you’ve paid over the odds for your home loan. In truth, hindsight is a wonderful thing for those who possess it.

Interest rate rises: the new challenge for homeowners

Now, however, homeowners face a new challenge when selecting a mortgage, as most analysts predict interest rate rises in the next 18 months; whether to select a fixed rate mortgage that will, initially, cost more but could save in the long term, or to opt for a variable rate deal that will be cheaper to begin with but runs the risk of rising in response to increasing interest rates.

The main problem is being able to forecast with certainty, not whether interest rates will rise, but when. In the most recent Bank of England committee meeting to review interest rates, only one member voted to raise them from their current level of 0.5%, compared to eight members opting to keep it unchanged. However, the Bank of England’s own governor, Mark Carney, has already publicly announced that he anticipates a rise in rates by the end of this year, yet many analysts are not forecasting increases until the second quarter of 2016. Constant uncertainty can only have one effect; to cause anxiety among mortgage borrowers keen not to lose money, who are unsure how to make a decision about which type of mortgage to choose with little clear evidence of how interest rates will change in the course of the next 12 months.

Choosing your ideal mortgage

Deciding whether to opt for a fixed rate or variable mortgage isn’t just a matter of affordability, although clearly your personal circumstances must be taken into consideration. If your household budget is stretched already, there is any uncertainty over the security of your job or you are a first-time buyer, a fixed rate mortgage may suit your financial situation as it offers a guarantee that your monthly repayments won’t rise over the term of the deal, irrespective of what happens to interest rates.

Unsurprisingly, because of the stability that fixed rate mortgages offer, 90% of new mortgages taken out in the UK are these types.

However, if your household budget has got some flexibility in it, a discount or tracker mortgage could be a worthwhile opportunity to save money while interest rates remain low. It’s important that you use an online calculator to check how your payments would increase if interest rates rise in units of 0.25%, up to two per cent. This will give you a good understanding of how affordable your mortgage will be, though take into consideration how certain you can be that your other expenditure won’t change during the term of the deal.

Seeking expert advice

The most important aspect of selecting a mortgage is to receive independent, expert advice, so that you can enter the process fully informed about your financial commitments and your ability to repay, especially if interest rates rise over the course of the next two years.