As Winston Churchill apparently didn’t say after all: when the facts change, I change my mind. Just a couple of months ago on The Property Podcast, I said that if I were taking out a new mortgage I’d fix it for five years. But today, I’d keep it variable from the start.
What’s changed? Well, just about everything.
It was back in August that the Bank of England’s base rate made the first jump that felt meaningful: a 0.5% increase, taking it to 1.75%. At this point, there was no reason to think that rates would come back down any time soon, so why not lock in now?
But then in September we had the “mini” budget – which turned out to be the most misleadingly named event since the “family fun days” I’m occasionally forced to go to. It contained tax cuts and higher spending, meaning the government will be committed to even more borrowing to make up the difference.
In its aftermath everything went (in economist speak) bonkers, and the eventual result was that that the markets started to anticipate higher inflation. The likely response to even higher inflation is even more interest rate increases from the Bank of England.
And that’s why fixed mortgage rates are currently so high: the money markets are pricing in a base rate of 5.75% next year. As the base rate drives lenders’ cost of accessing funds, they can only offer fixes to you today at rates above 6%.
However: I think people are expecting inflation to go higher (and remain that way for longer) than it actually will. As a result, I also believe that the projected base rate is also too high. If this turns out to be true, lenders' costs of funding will fall over the coming months – and so will the fixed-rate mortgages on offer.
So on that basis, I’d be happy to take out a discounted variable or tracker product today. At the moment, these are available to individuals with interest rates in the 3% range. Might that rate increase? Yes it probably will, but I still believe it will end up lower than today’s 6% fixes.
Of course, I need to be fully willing and able to live with the consequences of being wrong – and that’s entirely possible, as this year has already held plenty of unpredictable events and there will be more in the future. If you’re not able to handle this possibility, then the certainty of a fix (even an unattractive one) could be preferable.
I recorded this YouTube video to explain my thoughts about today's mortgage market in more detail.