The debate around when interest rates will rise and by how much has continued in recent weeks and many borrowers have already decided that it’s time to secure themselves a fixed rate deal to protect against future rate rises.
Thousands of others however will still be wondering what to do and trying to figure out when it’s the right time to review their current deal – especially those borrowers who have enjoyed low mortgage payments for the last couple of years (and ideally want to continue doing so for as long as possible).
The general rules still apply – variable rates tend to have the lowest initial rates, but they will rise along with interest rates. Fixed rates tend to be more expensive, but for that extra cost you’re getting the security of knowing that your mortgage payments won’t change for the duration of your deal. The longer you fix for, the more you’re likely to pay, but longer the period of certainty.
However, as well as the obvious decision between a fixed or variable rate, there are a few other options that borrowers can consider – ones that may offer you advantages of both.
Switch to fix
A number of lenders now offer variable rate deals that give you the option to switch to a fixed rate in the future, without incurring any Early Repayment Charges. This means that you can benefit from a variable deal while rates remain low and then easily switch to a fix in the future when you feel the time is right.
While this sounds like a fantastic best-of-both-worlds deal, there are limitations. First of all, when switching to a fix, you will be restricted to the range of deals offered by your lender at the time you want to switch – there’s no guarantee that those deals will be competitive at the time. Then there’s a new arrangement fee to factor in (although you should avoid any legal or survey costs).
Also, if you wait until interest rates have risen before switching to a fix, then the rates on offer to you will have no doubt risen already.
Lenders that currently offer switch to fix options on their tracker rates include Woolwich, Nationwide, Royal Bank of Scotland and Skipton Building Society (on certain deals).
Capped rates have made a bit of a comeback in recent weeks and there have been some good deals on offer. Again, capped rates offer a best-of-both-worlds scenario – a variable rate that can move both up and down, but with a cap above which the rate won’t go. Sometimes, the current pay rate and the cap are at the same level, so you’re rate can only go down. Others will have some room for increase before the cap is reached.
With a lot of uncertainty over how far and how quickly rates will rise when they eventually do, having a mortgage deal that is guaranteed not to go above a certain rate certainly has its attractions.
With a capped rate though, having your cake and eating it can come at a cost – the variable and capped element of a capped deal are usually more expensive than a standard variable or fixed rate respectively.
Whatever deal you choose, the important thing is to make sure that it works for you and your budget. After two years of interest rates stuck at just 0.5%, it’s easy to get used to low mortgage payments and not be prepared for when they start to rise.