‘Why fix for the long-term to hedge against unlikely rate rises?’ | Mortgage Solutions
Fixed mortgage rates
So this week, Mortgage Solutions is asking:
Do you think it’s the best time to lock into a longer rate? Or might borrowers risk missing out on better deals later down the line? by: Shekina Tuahene
Richard Campo, Managing Director of Rose Capital Partners
The first thing to look at when assessing whether a two- or five-year product is most suitable, is to understand the client’s objectives.
As that overrides what you may, or may not, think the market may do.
Assuming that is done, we then look at the available market data. While it may seem counterintuitive, two-year deals should offer the best value in the long term.
If you look at two-year swaps and the London Interbank Offered Rate (LIBOR) they are both below the current Bank of England base rate, which indicate rates are more likely to go down than up in the short term – three months to two years to be specific.
Meanwhile over a five-year period, financial markets are only predicting a small chance of a rise.
If you are in the high loan to value (LTV) brackets, keeping the deal short term and reducing the debt as much as possible over that period may well get you a better deal when you come to refinance.
Two huge risk warnings though – firstly, that assumes house prices will go up over two years which may not happen and secondly, financial markets don’t always get it right.
It is a good indication on pricing over the next three, six and 12 months, but beyond that, there are simply too many variables right now to say with any certainty what the future may look like.
However, all logic would point to interest rates staying very low, for a very long time, so why fix in for the long term to hedge against something that isn’t likely to happen.
Read the full Mortgage Solutions article.
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