Should I fix or go for a variable rate mortgage? It is perhaps the most common question to be posed by mortgage borrowers, whether they are looking to buy a new property or thinking about switching their current mortgage to a new interest rate. What they generally mean is not whether fixing is a good product choice for them but whether it will work out cheaper than a variable deal over the next 2, 3 or 5 years.
It really is the perennial dilemma for borrowers and is an impossible question to answer definitively unless you are in possession of the proverbial crystal ball. No matter how you approach it the cheapest deal will depend entirely on what happens to interest rate movements in coming months and years.
Of course, being the topic at the forefront of most borrowers’ minds means that it’s always a favourite for debate amongst market commentators and economists. Although there is clearly extremely useful insight to come out of economist findings there is never any guarantee that they will be correct. It is also generally true that you will be able to find an opinion or forecast that is either more extreme than or is a polar opposite of the majority view.
Unfortunately, all too often the talk around whether it makes sense to fix will be based on someone’s view of what will happen to interest rates. If that view means that variable rate would look cheaper there can be a temptation to brand fixed rates as poor value. That may well turn out to be true when looking back with the luxury of hindsight but there are other factors that need to be taken into account.
After all for every forecast that proves to be correct there will be a number that are way off the mark. Economists are currently trying to make sense of what remains a very uncertain and volatile market. That inevitably leads to a shifting expectation of what will happen to interest rates and new economic data continues to trigger changes in thinking.
This week has shown how uncertain the outlook remains as continuing fear over the euro debt crisis and US economy has led to a collapse in world stock markets. That is unlikely to reduce the expectation for interest rates to remain low for some time to come.
However, it was only the beginning of this year that the market fully expected an imminent rise in Base rate and fixed rates began to climb as a result. That increase never came about and rate predictions have subsequently turned right around with the majority (not all!) of a recent BBC poll suggesting there will be no move this year.
So how should borrowers approach the question of what deal to go for? They really need to think about what will be the best deal for them by considering how well equipped they are to deal with different levels of rate increase. If a borrower is convinced that rates will remain low but is also able to deal with an uplift in their mortgage costs they could make a sensible decision to go for an initially lower but variable tracker deal.
If however the thought of worrying about whether, when and by how much rates might move in the years to come scares the living daylights out of them then the security of a fixed deal will help ease those worries. Even worse if they would find their monthly budget squeezed by relatively mild increases they perhaps need to decide whether it is a risk that they can afford to take.
In short, you have to focus on making the right choice for you – after all you will be the one having to meet the payments. Security of a fix may end up costing a bit more in the long run but that could be a worthwhile premium to pay for knowing exactly where you stand amid the uncertainty of the current market.