In a few weeks’ time we shall finally be released from a financial commitment I made more than five years ago. The fixedrate period on our mortgage is about to end and, in theory at least, we will be free to scout Britain’s increasingly bustling market for home loans in search of an alternative deal.
Looking back to early 2009 offers an excellent illustration of how our financial world has changed. Back then, a loan with the rate fixed for five years at 4.15 per cent looked unbeatable, especially to someone who suspected that inflation (and therefore interest rates) would soon start climbing thanks to all the new money that the Bank of England was about to summon up.
Of course, my view of what lay in store for the economy was wrong—or, to put it generously, has not yet turned out to be right. In the intervening years we have all had to get used to the idea that interest rates can stay lower for longer than we thought possible. The result is that today one can borrow for ive years at fixed rates as low as 3 per cent, which makes my mortgage look rather less stellar. Getting that call wrong has cost us somewhere between £15,000 and £20,000 in extra interest over five years, making this one of my more expensive financial decisions— although knowing with certainty what it will cost to live in our house for the next five years also has a significant, if unquantified, value.
So now the question is what to do next. Should I attempt to fix for another five years at an even lower rate, making the same bet I got wrong last time but on better terms?
It seems to me that this decision boils down in part to the question of how far I believe what Mark Carney, Governor of the Bank of England, is currently saying about the future path of interest rates. The Bank’s “forward guidance” suggests they will stay where they are for at least another year, that they will then rise only gradually and in small steps, and that ultimately they will settle at a level below what was regarded as normal (say 4-5 per cent) in the years before the crisis.
Do I bet against the Bank of England, or with them? If I think Carney’s forecasts are doomed to be as wrong as my own, I should probably go for the lowest fixed rate I can find. If I suspect his view is correct, it’s a more finely balanced judgement.
Having tried lots of ways to think about the dilemma, I’ve been forced to conclude that no one has the slightest idea what the future holds and that the only sensible way to make a decision is on the basis of things I know to be true today. So I am going to stick with the mortgage we now have.
There are two main reasons for this. First, switching involves transaction costs—there’s a £995 fee for the new deal I would probably go for, as well as various smaller charges. These extras are often forgotten in the hunt for the best rate but, just as in investing, costs will eat into your return and can make a good deal significantly less good in the end.
Second, the mortgage we took on in 2009 has one major advantage. At the end of the fixed term, it will switch for the remainder of its life to charging interest at a premium of 1.99 per cent over the base rate. Since the best lifetime tracker mortgages on the market today are no better than that, offering a spread of less than 2 per cent over the base rate for the next 20 years clearly does not represent an attractive proposition for the banks. If it’s not a good deal for the banks, it probably is a good deal for the borrowers.
That view is reinforced by one other thing I know to be true today: if we took on another five-year fix now, the rates we could expect to pay when it ended are a lot more than 2 per cent above the base rate. My guess is that over 20 years, this difference would cost us a good bit more than the £15,000-£20,000 we have lost out by so far. In the absence of perfect foresight, that’s as sure as I can be.