Two or five-year fixed rate?
WHAT is a mortgage owner to do? Most have acclimatised to ultra-low rates well below the norm.
If I talk to my under-40 friends about interest rates at over 15 per cent, they say I sound like their grandad: “when I was a lad”.
It's a reality, the monthly payments I had were mathematical proof, as there was nothing left in the account.
I remember a 10-year fixed rate offered at 10.5 per cent and everyone jumped at it. How times have changed.
Should you fix now, and if so, for how long?
The big influencers are geo-political and noisy, but here you go:
Brexit of course is there like a drunk in the chip shop. I've assumed all along they would never do it, given the complete shambles they have made. Its six months away and government staff are changing like their minds do.
I cannot see they actually want to do it given the complete lack of dialogue or effort. We'll see.
A hard Brexit equals a falling sterling, followed by imported inflation as the UK is a net importer. Inflation equals higher interest rates, even though the person on the street isn't driving this inflation through spending!
We have had quantitative easing (injection of cash into the system to keep it afloat) for some time. At some point, those balance sheets need to be redressed by central banks who already hold $20 trillion.
Can the economy take that? We have certain fragilities right now.
Quantitative easing, or ‘intervention' boosted stock markets and kept them afloat. Why did central banks do that? Why interfere? Isn't that what capitalism is about?
There is undoubtedly uneasiness in the market too. Consider the euphoria from Trump regarding market highs since he has been there. If we took the performance of the FANG stocks (Facebook, Apple, Amazon Netflix and Google) out of the S&P 500 for the first half returns of the year, it would be negative. Top heavy.
Short sellers (who bet on markets going down) on the tech sector are up 40 per cent this year.
Couple all this with global record debt, it's hard to see how markets and property could take sharp quantitative un-easing or sharp interest rate rises.
Central banks however, have nothing up their sleeve for any shocks, and the shocks are there. Lowering interest rates is one of the two great moves and gives everyone a feeling of Euphoria as they have more ‘dosh' for the Saturday night and Christmas.
It's a bit tricky to lower rates when you are already close to zero, so perhaps the subtle rises will allow that option to be used later.
Conversely, if the UK government turn up to school like the 11-year-old without their homework done, and decide the whole Brexit thing was ‘a bit of a laugh', Sterling would soar, inflation fall, and for the most part (given recent polls) people/companies would be happier to invest and spend, thereby stabilising the economy.
And so, our mortgage customers have looked at whether to fix for longer periods. The decision is mainly a gamble on the above information.
The choice appears to be between two and five-year rates. The monthly costs between the two are fairly marginal, which is perhaps why people are opting for that longer security in the face of such madness.
The higher your loan to value, the bigger the gap between the short and long-term rates. At a 90 per cent loan to value, a two-year fixed rate is 1.86 per cent, five years is 2.38 per cent and ten years is 3.15 per cent.
At a 60 per cent loan to value, the two-year fixed rate is 1.39 per cent, five is 1.83 per cent and ten is 2.49 per cent.
The rates taper as you drop between 90 per cent and 60 per cent loan to value.
If you fix for longer and Brexit etc doesn't occur, and you want out, you will be pounded by redemption penalties of 5 per cent. The charges between providers vary wildly, so be sure to ask your mortgage broker to guide you through that.
Finally, there are some societies who offer a five-year fixed rate but with no penalties for early redemption. Having your mortgage cake and eating it.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a list of the best fixed rates call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.