Fixed Rate or Variable: Which is the Best Mortgage for You
It seems almost unbelievable, but if the house price indices are right, then prices are almost back to where they were a year ago.
According to the Halifax, prices are up 4.2% from their summer low while the Nationwide reckons theyíve rebounded by a whopping 7.2% over the same period.
Economists seem at a bit of a loss as to how this can have happened. Unemployment ñ the usual barometer of house prices – has risen sharply and is forecast to continue rising over the following year. So for now at least, the recovery is being pinned on the recovery of confidence in the stock market. Buyers have seen that investors are confident about the future of business and so the thinking goes that house prices must surely follow.
Focus on what has happened over the past few months alone, and youíd be justified in thinking the recoveryís well underway. The problem is that these simple headlines – which make for happy times if youíre already on the property ladder and despair if youíre not ñ are disguising a lot of other facts about whatís really happening.
It used to be the case that prices were measured against average earnings. Thatís why some years ago a single person would be limited to borrowing about three-and-half times their income while couples could usually borrow about two and a half times their joint income.
Traditional House Price Measures Are ExtinctÖ
That measure of ensuring a balance between house prices and what buyers could afford to repay went out the window when lenders decided buyers could borrow far higher ratios while interest rates were low.
Well, we all know what happened with that safeguard gone: the Credit Crunch.
The real problem in assessing what will now happen to house prices is that all the usual measures to establish whether they were above or below their historical trends are now virtually useless.
Many existing borrowers have mortgages many times the size of their salaries and the market has been further skewed by the huge expansion of the buy-let market. On top of this, lenders worried by the possibility they might have lent too much are no longer so concerned with buy-let ratios but want to ensure borrowers have substantial deposits instead.
Itís all combined to completely reshape the traditional models of how economists used to predict future swings in the housing market.
But one further unprecedented factor has not only turned the market on its head but poses one of the big conundrums faced by first time buyers and existing owners alike: whether to choose the security of a fixed rate mortgage or take a gamble on a variable rate.
The few who accidentally found themselves on a rate linked to the Bank of Englandís base rate following the credit crunch have found themselves in a very lucky position. And it is primarily having rates at a record low that is keeping the housing market afloat.
However, like new borrowers, they will have to do their homework if and when their mortgage reverts to a less favorable deal. The key consideration for anyone looking for a new mortgage, whether as a first time buyer or existing borrower, is to decide whether you reckon base rates are likely to stay low for years to come or are likely to increase.
Thatís not an easy call. The Bank of England has signaled it will keep rates very low whilst the economy remains in the doldrums. However, now that the market seems to be on the mend, we could see rates rise far sooner than anyone would have anticipated just a few months ago.
Then of course thereís the risk of a double-dip recessionÖ
So when it comes to choosing a fixed or variable rate mortgage, weíre sorry to say the best advice you can get is to listen to yourself rather than the legions of experts guessing when interest rates will rise and how much.
Listen to Your Inner EconomistÖ
Itís a guessing game, bank and building societies are playing on a daily basis, trying to squeeze you ñ their customer ñ for as much as they can while ensuring they remain competitive.
Whilst there has been a great deal of criticism recently of lenders increasing rates for their fixed mortgages despite the base rate remaining at 0.5%, this only reflects what lenders think might happen to the base rate over the term of your mortgage.
Essentially, theyíre insuring themselves against what they think might happen.
And thatís the key to it really. If youíre inner economist is telling you the extra you currently have to pay on a fixed rate mortgage is excessive considering you think base rates will stay at rock bottom, then a variable rate mortgage is the best for you. If youíre happy to pay that premium (and like the idea of knowing exactly what youíll have to pay each month) a fixed rate mortgage is probably your best bet.
But the way to ensure youíre getting the best deal available, regardless of whether youíve chosen a fixed or variable rate mortgage, is to compare like for like products once youíve decided the type that suits you best. Identify how willing you are to be tied into a mortgage term and work out how much you would be prepared to pay to switch at your convenience. With these two factors decided it is fairly simple to identify which lender is offering you the best combination of interest rate and arrangement fee.
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