As [1] Less2sell Online estate agents have reported previously, interest rates are on the rise.  The Bank of England have increased the interest rate 5 times ([2] see our historical interest rate page for actual increases) since August 2006 to try and controll the UK inflation.

 So, does it make sense to avoid the pain of future rate rises by locking yourself into a fixed-rate mortgage now? This question is extremely difficult for [3] Less2sell Onlline Estate Agents to answer, because it depends on your own view on the future direction of interest rates, your personal attitude to risk, how affordable your monthly repayments will be, and so on.

If you are comfortable with knowing how much you mortgage is going to cost you per month for a pre-arranged period, then a fixed mortgage should be right up your street. However, if you think that interest rates are near their peak (some analysts think that 6% is the peak) and will come down over the next year, then a variable-rate deal may be a better bet.

I recently came across an article writen by Cliff D’Arcy of [4] www.fool.co.uk who in order to gain some insight into the ‘fixed versus tracker’ debate decided to investigate the actions of its own users.

Each month, thousands of people apply for home loans via the Fool’s award-winning, no-fee, whole-of-market [5] mortgage service.  The outcome from the investigation was as follows:-

• More than two out of three people (68%) took out a fixed rate; and
• Of the remainder (just under a third of the total), 31% took out tracker mortgages, with the remaining 1% taking out other variable-rate home loans, such as discounted variable, capped and low standard variable rates.
• Of the people who took out fixed-rate home loans, they found that:
• Over seven in ten (71%) took out a two-year fix;
• Nearly one in five (19%) opted for a five-year fix;
• One in fourteen (7%) went for three years;
• One in fifty (2%) pushed their fix out to a decade; and
• The remaining 1% took out fixed rates lasting for between one and 25 years.

So, the conclusion is that if you’re one of those people who feel comfortable following the herd, then two- or three-year fixed-rate home loans seem to be the flavour of the day. However, if you are a risk taker and want to gamble on interest rates coming down (as I am!) then a tracker mortgage might be preferable.

Which ever option you choose remeber that your home may be repossessed if you do not keep up with repayments.

Related Links

[6] UK Interest Rate Rises by 0.25%

[7] Beginners Guide to Predicting the Outlook for the Housing Market

[8] UK Housing Market Shows Signs of Slowing Down

[9] Mortgage Bills Set to Increase for 2.8 Million Borrowers.

[10] UK Top Lenders Remove Fixed Rate Deals

[11] Historical Interest Rate Decisions