Does It Make Sense to Lock a Variable Mortgage?

Interest Rates

If the base rate set by the Federal Reserve is low and looks as though it won't move for a while, you'll probably be better off, in the short-term at least, sticking with a variable rate deal. Although this can be difficult to call, keeping a close eye on the forecasts of economic commentators can give you some indication of what's likely to happen to interest rates. If the economy is performing poorly, the Reserve will look to keep interest rates low to stimulate growth. If the economy is overheating and prices are rising, rates are more likely to rise. As most variable rate mortgages track the base rate, the amount of interest you pay will be dictated by the performance of the wider economy.

No matter what the economic climate, the price of fixing may be worth paying if you wouldn't be able to afford your mortgage if rates rose beyond a certain level. Although this point will be higher for some borrowers than others, consider fixing if a small rate rise would leave you unable to make ends meet. If rates are low, there's usually only one way they'll go. Paying extra on a monthly basis may pay dividends a year down the line if rates rocket.

As well as paying extra interest compared to a variable mortgage, you'll have to pay a fee to arrange a fixed rate deal in the majority of cases. This may be a flat charge or a percentage of the principal of the loan you want to take out. If you have this added to your loan, you'll be paying even more interest. If you've recently come to the end of a fixed deal and reverted to your lender’s variable rate, you'll have to pay a fee to sign up for a new fixed deal.

Be wary of fixing your mortgage for too long. Anything over five years should be avoided unless the rate you're offered is too good to turn down. Despite the fact that it's very difficult for even the most well-informed financial experts and economists to predict how the economy will perform in the medium term, longer fixes are always priced assuming that rates are likely to rise. Long-term fixed deals will generally be more expensive than shorter term deals as a consequence. If you're happy to pay a premium for the peace of mind, the security of a long-term fix may be a good investment.