The mortgage market has always involved an element of risk – if you get a long fix and rates drop, you may end up paying more over a longer period and vice versa – if you opt for a short deal and rates rise, you could get a bill hike.
The recent conflict in the Middle East has upped the stakes. Mortgage rates always fluctuate a little, but the Iran war has made it even harder to predict what will happen next.
In gambling terms, we’ve gone from playing the penny slots on Brighton Pier to blackjack in a Las Vegas casino.
Since the start of the conflict this spring, average fixed mortgage rates – which most households have – have flown up by a percentage point, equivalent to hundreds of pounds in many situations, although they have recently dropped marginally.
If these higher rates were set in stone, buyers and borrowers would in some senses have it easier as they’d be in the same boat as everyone else – having to suck it up and pay the more expensive bills, or borrow less. But the unpredictability is jeopardising the situation.
First time buyers and homeowners don’t know if in the next few months or years, their choice of mortgage could ultimately mean they’ve locked in lower bills or in fact they’ll end up paying thousands more, should rates drop.
There are two main type of mortgages. The first are fixed loans – the mainstay of the market – which are priced primarily on swap rates, which go up or down based on trader predictions for where the Bank of England base rate goes in the future.
At the moment, the base rate stands at 3.75 per cent, but traders expect potentially two rises in the medium term, and so most lenders are pricing their mortgages at 4.5 per cent or higher – to allow for a profit margin on top.
Alongside fixed mortgages, there are variable mortgages too, of which one sub-type – the tracker – is providing borrowers with a conundrum.
This sort of deal offers a rate that directly follows the Bank’s base rate, plus a margin on top. At the moment, the cheapest of these sits at bank rate plus an additional 0.19 per cent.
But the key element posing a financial dilemma for many is that the Bank of England hasn’t actually upped its base rate yet. In fact, some economists don’t think it will at all. As a result, these tracker mortgages currently provide a sizeable saving on fixed rates, with some even being below 4 per cent.
It means that the gamblers are able to go for a tracker, and cut hundreds from their monthly bills.
If the economists who expect no change are right, these people will have backed the winning horse. Yet, if the conflict gets worse – perhaps worse than anyone expects – and the bank rate is hiked, they could end up paying much more than those on fixed rates.
These people will pay more now, but if rates climb dramatically, will be protected.
It’s essentially a game of stick or twist – but with a lot of money on the line.
It’s hard to predict what happens next because we are reliant on the actions of politicians who have shown time and time again how volatile they can be. It’s also difficult to state how much of an impact this is likely to have on the property market over the next few months.
It’s already hard enough for those refinancing to know which mortgage to get, but for those who are are trying to get on the ladder, the volatility is making it even harder to know how much they can afford. This makes deciding which properties to view and target a near impossible task.
For those that do buy or remortgage, the next few months could be nervy. Unlike most gambles, it may not be clear for months who has made the right decision.