Over the last couple of years, rising interest rates have had a huge effect on the cost of borrowing. If your mortgage deal expires soon, you might be wondering if interest rates will return to “normal” and whether you’d benefit from choosing a fixed- or variable-rate mortgage deal.
The Bank of England (BoE) sets the base rate, and it’s increased it recently to tackle high inflation. While there’s speculation that the central bank will slash interest rates as the pace of inflation slows, it’ll consider many factors when deciding how to proceed. So, predicting when changes to the base rate might happen is difficult.
Higher interest rates have been “normal” in the past
Borrowers benefited from more than a decade of low interest rates following the 2008 financial crisis when the BoE cut rates as a global recession took hold. When the Covid-19 pandemic began, the Bank slashed the base rate to a historic low of 0.1% in March 2020.
So, for some, low interest rates might seem “normal”. Yet, if you look at the history of the BoE’s base rate, it’s the period of low interest rates that stands out.
Indeed, in the years before 2008, interest rates were around 5%. There have been times when the base rate has been much higher too. In the late 1980s, it neared the 15% mark and older generations will remember the impact interest rates of 17% had on their outgoings in 1979.
While the base rate might be stable for a period, it changes according to the economic circumstances. As a result, changes are likely to continue in the future.
For mortgage holders, that means it can be difficult to assess if you’d be better off choosing a fixed- or variable-rate mortgage. Reviewing your situation and what you’re comfortable with could help you choose a mortgage that’s right for you.
The pros and cons of choosing a fixed-rate mortgage deal
With uncertainty about how interest rates will change in the coming months and years, you might be considering whether it makes sense to choose a fixed-rate deal now, or to wait.
The main benefit of choosing a fixed-rate deal is that you know how much your repayments will be for a defined period, often between two and 10 years. As a result, it could be a good option if you want the security of knowing your budget won’t change if interest rates rise.
If interest rates did increase, you might benefit financially if you chose a fixed-rate option.
Of course, the downside is that if interest rates fell, you wouldn’t benefit – you’d continue to pay the rate that you’d fixed. If this happened, you could be worse off financially.
So, when you’re weighing up your options, setting out what’s important to you might be useful. Would you feel more comfortable knowing that your repayments can’t unexpectedly rise?
While some experts predict that interest rates will fall in the medium term, this isn’t guaranteed. So, if you choose a variable-rate mortgage, assessing how a rise could affect your budget might help put your mind at ease.
One thing to keep in mind when you’re taking out a new mortgage is that if your interest rate has previously been fixed, your repayment might be higher than you expect.
The BoE predicts that between the second quarter of 2023 and the end of 2026, around 5 million households will be affected by higher interest rates. On average, households will see their repayments rise by around 39%.
So, reviewing your budget before you start searching for a new deal could be useful.
A mortgage adviser could help you search the market for a deal that’s right for you
One of the challenges of finding a mortgage at the moment is that interest rates and the deals available are changing frequently. Indeed, according to Moneyfacts, the average shelf-life of a mortgage was just 15 days in March 2024.
Working with a mortgage adviser could ease some of the pressure you might feel. A mortgage adviser would take the time to understand your circumstances and search the market on your behalf to find a lender that’s right for you. They can also offer guidance when you’re completing the application form to reduce the risk of delays.
Contact us to discuss how we could help you secure a mortgage
We could help search for a mortgage that suits your needs and answer questions you might have about what interest rates mean for you and your budget. Please contact us to arrange a meeting.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 08/05/2024