In recent years we have all become very used to low interest rates. Since the global financial crisis of 2008, rates have remained below 6%, reaching a record low of 0.1% in March 2020. This has been great for homebuyers, with mortgages becoming more and more affordable. Now that the Bank of England base rate has increased to 0.75 percent, with further increases looming, what’s the outlook for mortgages?
Interest rate increases intended to curb inflation pressure are set to increase costs for anyone coming to the end of a fixed rate deal, as refinancing is likely to come at a higher price. Two year deals are generally standard, but with inflation currently at around 7%, we can probably expect further rate rises and it could be some time before we return to the current low. So if you’re taking out a new mortgage now, it might be worth fixing perhaps for a longer period.
Aaron Strutt of Trinity Financial says that ten-year deals, common in the United States but traditionally less popular here, are worth considering in the current climate. These deals lock in an interest rate and deliver a monthly repayment that won’t change, regardless of what happens to interest rates. Strutt says: “Ten-year fixed rates have increased in popularity and more of our clients are taking these deals. They like the thought of the long term payment security and not having to worry about future Bank of England base rate hikes.” Rates are also very favourable currently, and the prospect of avoiding remortgage fees for a decade is potentially significant too. “The cheapest ten-year fixes offer great value for money at the moment. While the cost of two-year rates has increased, the longer-term products have not gone up as much.” He notes that Nationwide Building Society has a ten-year fix at 2.24% for those with a 40% deposit, and Halifax and Skipton Building Society offer sub-2.65% ten-year rates for those with 25% deposits.
However, committing to a ten year deal is not for everyone. Many of the ten-year fixes have expensive early repayment charges, so if you are not sure if you want to stay in the property for the foreseeable future, a shorter deal may be more suitable. It’s important to remember that you will not be able to repay the mortgage in full within the first 10 years without incurring penalty charges. You may still be able to move house, but only if you take the mortgage with you, and the lender needs to agree to the new purchase.
As the cost of living continues to increase, it might be worth committing to a long term deal for guaranteed peace of mind, though probably more for those who are not planning to move in the near future. Interest rates, although rising, are still low, and there are still good mortgage deals to be had on all terms, so now’s a good time to be fixing for whatever period of time suits you.