Martin Lewis: Warning - fix your mortgage if you want certainty but you could end up paying more than you need to
Planning to fix your mortgage? You might want to wait a little while longer before doing so as you could end up paying more than you need to. That's the warning MoneySavingExpert.com founder Martin Lewis gave in the opening episode of the new series of ITV's The Martin Lewis Money Show Live.
The clip above has been taken from The Martin Lewis Money Show on Tuesday 18 October 2022, with the permission of ITV Studios. All rights reserved. You can also watch the full episode on the ITV Hub.
Here's a full transcript of Martin's thoughts on mortgage fixing, plus insight from Liz Syms, vice chair of the Society of Mortgage Professionals
Angelica Bell [Martin's co-presenter]: This (question) came in from Leanne: "We really need your help. We're on a repayment mortgage, would you suggest we fix now or hold out for the rates to drop?"
Martin: "Well, that's the million dollar question, isn't it? So look, I prepared a graphic on this, because I think there's a lot of confusion about how mortgage rates are set. If we can bring that up for me, that'd be very helpful.
The screenshot above has been taken from The Martin Lewis Money Show on Tuesday 18 October 2022, with the permission of ITV Studios. All rights reserved.
"So look, the bottom line is the Bank of England base rate, the UK interest rate. Now, if you are on a variable, or discount, or tracker mortgage, the amount that you pay depends on that base rate. The top line is the cheapest two-year fix that is available on the market for somebody with 60% LTV [loan-to-value], the very cheapest.
"Now if you look at that graph, you will see they're not in sync these two lines in recent times. And that's for a simple reason. The fix rates that you can get do not depend on the Bank of England base rate, they depend on something called swap rates, which are mainly based on the gilt rate, which you will have heard about in the news. The gilt rate is the cost of UK Government borrowing.
"So what happened in that mini-budget, either caused by the mini-budget, or some would argue coincidentally, apparently, with the mini-budget, is UK Government borrowing got much more expensive, and that translated almost immediately into mortgage rates, because that two-year fix is effectively based on the City's prediction of future interest rates. Whereas this is the current interest rate.
"Now, I said at the beginning of programme, we're expecting that to go up by perhaps one percentage point in November, but it still won't be close to touching the cheapest two-year fix."
Martin: 'You may want to hold onto a variable rate if you don't need price certainty'
"So some people are thinking we may now be peaking at fixed rates, in which case, you may want to hold on onto a variable rate. A couple of weeks ago the standard advice was grab a cheap fix when you can, because things are going up very quickly.
"The entire macroeconomic situation has now changed and now we're probably moving into 'hold on a little bit'. But don't just take my word on it, because we have a regulated mortgage broker in the audience. Hello, Liz, thank you for joining us. What do you think about that? What would you do?"
Liz: "I agree with you, Martin, that, you know, a couple of weeks ago was 'grab the cheapest fixed rate'. But now you've got to be thinking about actually, the difference between a discounted rate and a fixed rate at the moment is sort of 2.5%, sometimes even 3%."
Martin: "So historically, that's huge, isn't it?"
Liz: "Absolutely is. So if you go for the fixed rate, all you're guaranteeing is you're paying more. So it's going to come down to your attitude to risk, because if you go for the discount rate, you'll definitely be paying less at the moment and then it's just the question mark of how much rates may increase in the future.
"But all the time you're paying less than the fixed rate is today, you're going to save a bit against any increases that may go above the fixed rate later on. So it comes down to attitude risk, really."
Martin: Check for early exit fees on discount rates
Martin: "So there are two questions that follow up on that: most discount rates - variable rates - which are the cheaper ones at the moment - in most cases, you're able to leave those penalty free. So you could go for a fixed later on if you wanted - there might be some fees for moving mortgage. That's right, isn't it?"
Liz: "Yes, historically, those discounted rates as tracker rates have been penalty-free, but do watch out because some lenders are coming with some small penalties now on those discount rates as well."
Martin: "But if you are tactically going onto your standard variable rate and the cheap rate just to wait to see if fixes come down, you want to make sure it's penalty-free. And where do you think, I mean come on here - I've got my crystal ball there - let's give you a crystal ball; do you think that cheap two-year fix is going to come down over the next month or two?"
Liz: "Because they're based on sentiment, and because the market already thinks that those rates were going to rise, some of that rise has already been priced in. So I think there probably will be some more increases to the fixed rate, but by how much is a crystal ball.
Martin: "Unlikely to be as sharply as we've seen, whereas at the same time we're expecting the Bank of England base rate to go up pretty sharply.
"So that's the balance. I mean, if you want surety, a fix always gives you surety but you might be locking in a high rate, so you may just want to wait a little bit on your variable rate to see what happens."