If you’re currently better off thanks to your mortgage provider’s low standard variable rate (SVR), you probably won’t be considering a switch to a new mortgage deal. However, with fixed rate deals currently at a relatively low level, and the possibility that interest rates will start going up, you may want to think again.
What’s next for rates?
No-one knows when - or how quickly - the base rate will rise, but one thing is almost certain - the next change will be upwards.
In fact, while the base rate looks set to remain at its current level for some months yet, some are anticipating that inflationary pressure could see rates pushed up early than might first have been expected.
Once rates do move up, it's quite possible that they will rise rapidly. This could prove very uncomfortable for anyone still on a variable rate - and particularly for those who have got used to making reduced monthly repayments.
Negative Equity
House prices remain unsteady, and there's every chance that they will continue to be so when rates do start to rise. This means that many homeowners will be at the mercy of higher interest rates without being able to remortgage, because of insufficient equity, or negative equity.
Negative equity is where the amount you have borrowed from your mortgage lender exceeds the value of your property - and can make it very difficult to remortgage. This is one reason why you might want to consider taking action before you find yourself in this situation.
Benefits of an SVR
As many SVRs stay at around 2 per cent above the base rate, this historically meant an expensive hike in mortgage repayments at the end of a mortgage deal period, which also meant you could usually save money by switching to a new deal. However, with the base rate on hold at an all-time low of just 0.5 per cent, some lenders’ SVRs have decreased dramatically - prompting many borrowers to delay tying into a new deal.
Nonetheless, while cheap SVR deals can be favourable for the short term - as this means low monthly repayments - these deals could become unaffordable very quickly if interest rates start to go up again, as your monthly repayments could rapidly rise.
Benefits of a Fixed Rate Deal
As it’s unlikely that longer-term fixed rates are going to get much lower, homeowners might want to consider locking into a fixed product. A fixed rate mortgage lets you know exactly what your monthly repayments will be for the length of the deal, and allows you the peace of mind that repayments won’t rise during that time.
Despite increases over the last year, you can still find some relatively cheap fixed rates out there. If you are interested, make sure you shop around and compare mortgage deals to find the right one for you.
And finally…
Before taking the plunge, make sure you do the maths to work out how much you could be paying on your SVR if rates start to climb, and then compare this with any potential savings you could make by remortgaging to a fixed rate deal.
If you've got a mortgage in mind and want to know how much you'll be paying back each month, try our mortgage calculator tool:
