Choosing the right mortgage takes time and thought.
The investment in thinking is to get clarity about what you reasonably foresee happening, to you and the economy, in the next few years.
The reason this matters is that not all mortgages will allow you the same options. In my book having options is always good.
Fixed rate good, variable rate bad: right? The main selling point of fixed rate loans is the certainty of monthly repayments they give.
Typically the fixed period is two- to five years, although headline-grabbing 10-year products do occasionally come to market.
For this period your payments won’t change even if Bank base rate does. So, if you can afford it now, you will be able to afford it in future which gives assurance.
At the moment base rate’s next move is most likely upwards.
That guarantee of affordability sounds good; but there are a few questions to be considered. How big is the benefit to be had from “going fixed”?
Base rate is not predicted to go up any time soon and perhaps not even until 2016. But if we assume it increases in twelve months’ time by 0.5 per cent then you need a two-year fixed rate today to be no more than 0.25 per cent more expensive than the alternative variable loan to pay for itself. And that’s ignoring fees; typically fixed rates carry much bigger fees than variable mortgages. As an example, fees of £2,500 can be payable for fixes, whilst many variable mortgages are fee free.
That certainty of monthly payment generally looks like a paid for “extra” when these costs are factored in.
Another feature of fixed rate mortgages is their relative inflexibility. Lenders normally “hedge” their fixed rate mortgages to remove their own risk of market rates changing whilst they are locked into fixed receipts from borrowers.
The hedge (an interest rate swap) needs to match the mortgages closely to eliminate this interest rate risk. A lender who makes £10m of new mortgages wants a £10m hedge to go with it.
If the amount of mortgages falls from that £10m, the effectiveness of the hedge reduces. Lenders therefore don’t like borrowers paying down or paying off fixed rate loans early.
As a result, fixed rate mortgages normally have “ERCs” or Early Repayment Charges which are payable if the loan is repaid in the fixed rate period. These might be three-five per cent of the loan balance; a chunky £5,000 on a £100,000 mortgage.
So thinking about whether, and when, you may want to get rid of the mortgage, is key.
I said getting the right mortgage needs thought and time. The second stage is to spend time looking at the rates and the ease of doing business. One deal recently caught my eye; a 35-year fixed rate (to 2049!) at 2.60 per cent - but sadly it’s not available here, only in Japan.
Mark Robinson is the chief executive of Market Harborough Building Society
For more information about the society, see its website at www.mhbs.co.uk.