In today's very competitive mortgage market where we are at the bottom of the interest rate curve, fixed rate mortgages must be considered as a low risk option over the next five years when we know interest rates must rise.
What we do not know is how quickly they will rise and to what level. All the signs and feed back that we get from the market indicates that it is unlikely that we will see an interest rate rise in 2010, and if we do it will be 0.25%.
Any real change in interest rates in this very fragile market will almost certainly put paid to any tangible recovery in the economy, so the Bank of England must tread a very fine and measured pathway through the jungle of the recession before any small rise would be accepted and not damage the prospect of an early recovery.
In an ideal world you would always buy your fixed rate mortgage at the bottom of the interest rate curve when in theory fixed rate money would be attractive. However we have may have forgotten that Lenders buy fixed rate money on the money markets at X % and then price in the profit margin.
So what should be a no brainer, buy fixed rate money now because it is unlikely that we will see BOE Base rate at this level again in our lifetime, it not what it appears, Fixed rate money is not cheap in this market and by the time the lender has priced in the profit margin, you could be looking at a differential of up to 2% over a two years between a tracker and a fixed rate plan.
What clients should be very wary of is getting involved with linking your fixed rate plan to a hedging rate which is normally calculated on a daily basis with the difference being charged on a quarterly basis if the your actual pay rate has been exceeded by the floating rate. In almost every case because of the volatility of the money markets at this time you could end up with a nasty top up payment every three months. Unless you are very experienced you should avoid getting involved with this type of plan where heads the lender wins and tails the lender wins.
Fixed Rate Mortgage funds have always offered clients who want security a safe haven in which they are comfortable that they know for a given period of time which could be between one and ten years, exactly what their mortgage repayments will be irrespective of interest rate changes.
They may gain or lose as a result of this decision but they have peace of mind which to some clients is worth the risk of paying a little more to have security which fits their low risk profile.
What clients should also be aware of is that lenders who appear to offer a Fixed Interest Rate Plan that is so much more competitive than is rivals may be charging a very high arrangement fee which is added to the loan and will underpin the very low interest rate allowing the lender fudge the true cost of buying in the fixed rate plan. Be very aware of the fees and charges that maybe built into the plan and glossed over before the sale completes. Read your KFI document very carefully.
Fixed Rate Mortgage Plans are here to stay you just have to make up your mind if it is the right plan for you and over what period should you fix the interest rate, can you move house with the plan or change the plan without penalty should your circumstances change. Flexibility and being portable is essential if you may have to move house before the end of the fixed rate term. These plans are there, you just have to be precise about your expectations, it may cost a little more on the interest rate but better that than get caught with a nasty early redemption penalty if you have to change your mortgage within the fixed rate period.
