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Interest rates in the UK are still extremely low, although it may not seem that way to borrowers.  That means, mathematically, there is a whole lot more scope for them to move upwards than for them to move downwards.  With that in mind, borrowers might want to spend some time considering whether a fixed-rate mortgage would be the right choice for them.  Here are some points to consider.

Can I actually manage a mortgage at all?

If you are renting, then do your best to suck all the emotion out of the decision as to whether or not you want to “get on the property ladder” in the near future.  This can be very difficult, so you might want to enlist the help of a knowledgeable friend or financial professional).  If you are currently a homeowner and you have concerns about your ability to service your mortgage, then again, think long and hard about whether or not fixing your interest rate would really be the best approach or whether it might be best to sell now on your own terms and look for somewhere to rent.  This is probably an even harder decision than deciding whether or not to buy your first home, especially if there are children involved, but accepting reality now could end up being less painful than winding up in a foreclosure situation.

Does remortgaging make financial sense?

If you already have a mortgage then there’s nothing to stop you asking your existing lender if they’ll offer you a fixed-rate deal, but if they won’t, or you’d like to move elsewhere for a better offer, then you’ll essentially have to go through the whole mortgage-approval process all over again, with all the cost and hassle that entails.  Is the gain worth the pain?

Would an offset mortgage be a better option?

With an offset mortgage, you keep your cash savings with your mortgage lender, which sets them against your mortgage balance when calculating how much interest you are due to pay.  (Savers keep access to their savings and can use them as necessary or desired).  The basic idea is that it makes sense to forgo interest on your savings as it will be less than the interest you pay on your mortgage, which, in and of itself, is generally true (although it has to be acknowledged that there are different savings products with different rates so the sums can be a bit more complex than they might first appear).  In addition to the difference between the interest paid to savers and the interest paid by borrowers, there is also the fact that tax is charged on interest income.  Hence, if you are looking for ways to save money on your mortgage, then an offset mortgage could be an interesting option, particularly if you are a higher-rate taxpayer.

Would I benefit from the stability of a fixed-rate mortgage?

The real benefit of fixed-rate mortgages is stability, the security of knowing that your mortgage payments will be the same from one month to the next regardless of what happens with interest rates, however, this stability comes at a price as lenders which offer fixed rates will price them to reflect their perspective on what will happen in the future.  The longer the term of the fix, the harder it becomes to predict what will happen and hence the more a lender is likely to charge to protect themselves from the risk of making a loss on the mortgage.  In other words, fixed-rate mortgages may actually work out more expensive than variable-rate ones.  They also require you to have a plan of action for when the fixed-rate comes to an end, i.e. are you just going to accept a switch to a variable-rate mortgage or are you going to negotiate a new deal (or both)?

Your property may be repossessed if you do not keep up repayments on your mortgage.

Taryn

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