The End Of Fixed Rate Mortgages
Leaving Fixed Rate
With so many investors and purchasers soon reaching the end of the fixed rate mortgage deals that they entered into two years ago, the remortgage market is looking as buoyant as ever. Although there may be plenty of options out there, the financial climate has changed somewhat since these fixed rate deals were initially offered and many owners may find themselves facing a huge and often unmanageable jump in payments.
Interest rates have risen considerably in the last 2 years. At this time in 2005, the Bank of England interest rate was 4.5%; it is now 5.75% and some experts believe it will hit 6%, before the end of the year, 2007. Those who entered into fixed rate deals in 2005 have been largely untouched by these rises, as they are still paying a mortgage based on the 4.5% figure. However, anyone who had a variable rate mortgage will have felt the pinch, in recent times, and may have had to readjust to every rise as it happened. Any borrower now reaching the end of a fixed period is likely to have to deal with the whole 1.25% interest rate rise, in one go, making a huge difference to the monthly payments going forward.
How Much of a Difference?
As borrowers prepare themselves for the worst, it is important to remember that not everyone will suffer the same degree of ‘rate shock’. Borrowers who took out a fixed rate plan back in 2001 may not suffer that much as rates were at 6% in January of that year. But, by the end of the year, this rate had dropped rapidly to 4%. One broker commented: ‘If you are just coming to the end of a five-year fix, you will not see much of a shock, as rates now are roughly back where they were when you took out the loan…And there is a good chance that your income has gone up in that time, making your loan more affordable’.
How Can You as a Borrower Mitigate the Situation?
The key to dealing with this potential crisis is to prepare months in advance. When a fixed rate comes to an end, the lender will typically put you back on to their standard variable rate. With SVRs averaging around 7.75%, this can induce panic and prevent borrowers from adequately surveying their options. By planning ahead, a borrower can switch to a better deal immediately at the end of the fixed rate period, thus preventing even a single month of payments at the higher rate.
Fixed Rate or Not?
Most borrowers who have been on a fixed rate mortgage will be keen to stay on a fixed rate. But be warned; this is not necessarily the most cost effective option for the future. Whilst it does offer a degree of security and is excellent for the purposes of budgeting, bear in mind that fixed rates will not alter if the interest rates go down, during the borrowing period. Currently, fixed rate mortgages are being offered at around 6.25%. Therefore, unless interest rates trump 6.25% and continue to rise, there will be no benefit to the borrower from being locked into this rate.
Anyone who can afford to take the risk that interest rates will rise above 6.25% would be wise to consider the tracker rate mortgages that are commonly available. Best rate trackers are available at around 5.45%. Even if rates were to go over 6%, they would have to remain there for some time before anyone on a 6.25% tracker started to become better off.
Another issue to consider is financial flexibility. Once a fixed rate mortgage has been entered into, there are often very draconian penalties for anyone wishing to switch mortgages or to redeem early. With a tracker mortgage, there is always the option of moving to a fixed rate if that seems more suitable, some time in the future. Of course, penalties may still be imposed, but they are unlikely to be as harsh as those attached to fixed rate deals.
Financial Difficulty
Many people nearing the end of a fixed term period may well be in the uncomfortable position where they simply cannot afford ANY type of new loan whatsoever. If this is the case, all is not lost. One of the available options which can work wonders at reducing your monthly payments is to extend the term of the loan. This will mean that the payments are less on a monthly basis but, in most cases, will result in greater overall debt, as the interest is being paid over a longer period of time.
If you are in dire straits, it may be worth considering an interest only mortgage. This type of mortgage will, of course, reduce your monthly payments, but can cause longer term financial problems. By taking an interest only mortgage, none of the capital is being paid off. If you continue with an interest only mortgage, at the end of the term you will be faced with having to find a large lump sum, which may not be possible.
Anyone looking at an interest only mortgage should have some longer term plan in mind. For example, most interest only mortgages will allow overpayment, when you have extra cash; this allows borrowers to make inroads into the capital amount due as and when they have the financial means.
Similarly, it may be possible to take an interest only mortgage for the time being and then opting for a fixed rate repayment mortgage, when the interest rates drop (which is predicted to happen in the foreseeable future). Furthermore, by taking out an interest only mortgage, it will mean that borrowers keep a clean credit rating, thus allowing them a much better choice of mortgages, in the future.
Flexible Mortgages - The Way Forward?
Just as fixed rate mortgages were all the rage two years ago, it seems flexible mortgages may be about to take their centre stage place in the coming months. Today’s borrowers are not as sure of the property market and are much more reluctant to lock themselves into any sort of deal, no matter how good it may look on the face of it. Interest rates are no longer a certainty and taking a fixed rate mortgage may be seen as a risk that borrowers are unprepared to take. Many people firmly believe that interest rates cannot continue to rise and will begin to fall, in the near future. In this case, entering into a fixed rate now would be a clear mistake.
As a possible alternative, borrowers are now looking more towards flexible mortgages as a way of financing their properties. Crucially, many flexible mortgages allow overpayments, underpayments, payment holidays and, in certain circumstances, a borrow-back facility. This allows total flexibility in the face of potentially changing economic conditions. Borrowers are looking to take back control of their finances and want to make their own financing plans. For these individuals, flexible borrowing may provide all of the important solutions.
Summary
Anyone approaching the end of a fixed rate deal needs to keep their wits about them. Shop around early and be prepared to take a fragmented approach to sorting out your long-term financing. Most experts predict that interest rates will drop in the coming 2 years. Therefore, a fixed rate mortgage may not necessarily be the best way to proceed.
Fundamentally important is the need to keep a clean credit score. With so many lenders feeling the pinch from the credit crisis, lending criteria have become much stricter. Borrowers with any ‘black marks’ will find themselves paying a lot more than they bargained for. Worryingly, it has been estimated that approximately 80,000 people who are currently classified as sub-prime will be ending their fixed rates by December 2008.
Make sure you know where you stand and that you act NOW to deal with any upcoming mortgage rate changes!
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Tags: Fixed Rate Mortgages