Monday, 20 January 2014

CHOOSE ADVICE BEFORE YOU CHOOSE A MORTGAGE DEAL

Across the media fixed rate mortgages are fashionable. The logic goes like this; interest rates are at their lowest level for decades and the Bank of England base rate has been stuck on 0.5% for nearly 5 years so their only way is up, therefore grabbing a fixed rate deal now is the smart move, especially as there are still plenty great fixed-rate offers on the market. Indeed even a senior member of the Bank of England's Financial Policy Committee ,Richard Sharp, advocated this when he declared this week that "now is a good time to fix" when he delivered his perspective in front of the Treasury Select Committee. Obviously Mr Sharp was speaking in generic terms to UK families rather than providing mortgage advice, but he captured the mood that fixed rates are magnetic, as evidenced by recent statistics from the Council of Mortgage Lenders which reveal that 9 out of 10 new borrowers are opting for a fixed rate loan rather than a variable rate mortgage.
Automatic decisions always make me twitchy! I prefer to consider the options. That's why I believe in informed advice at an individual level before a new borrower plunges into the congested pool of fixed-rate buyers.
Choice across a range of alternatives is beneficial to the customer as is a tailored solution. Undoubtedly the attraction of a fixed rate deal is the certainty of knowing how much is payable each month for the period of the product, typically 2 or 5 years. Such an assurance is vital for many people as they weigh up affordability. BUT although the next move in interest rates will be upwards , we cannot say when that will occur and it could even be 2 years away. So the differential between a fixed rate and a comparable variable rate product can't be ignored. Even if rates rise in mid 2015, as some predict, a variable rate mortgage could be a smarter choice and this relative strength is even more pronounced when set up fees are taken into account. Most variable rate products are fee-free whilst fixed rates can carry fees of £2000 or more. This may be a heavy charge for the certainty of knowing your monthly payments. Unlike a variable rate mortgage there is a rigidity and inflexibility inherent in a fixed rate deal so if pliabilty is important to a customer then a variable rate product may be more suitable.
I am not getting all Orwellian and Animal Farm here....fixed bad, variable good........but nor is the reverse true. Crucially, the pivot is genuine choice via informed, professional mortgage advice so that no one is just shoe-horned into the latest fashion.

4 comments:

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  2. I agree with this assessment.
    A simple spreadsheet that includes an assessment (guess if you like) of when interest rates will move and by how much can provide an impartial modelled comaprison. This can then be tweaked for different rate movements; and the sensitivity determined determined. This can then inform the borrower of the different choices available to him or her.

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