Fixed mortgages worthwhile when interest rate hits 3.25%

Posted on March 15th, 2011 | Categories - Mortgages

Interest rates need to be pushed up by 1.75% for mortgage holders to benefit from switching to fixed rate deals.

Swapping variable mortgages for fixed rate alternatives too soon will prove more expensive to borrowers.

Locking into fixed rate mortgage deals will not be worthwhile for consumers until interest rates rise to 3.25%, new figures suggest.

Many borrowers are facing a difficult decision on whether to take up a fixed rate mortgage to safeguard against future rate rises. Home owners with variable rate mortgages would see their payments shoot up in line with any increases – they are worried that the Bank of England will hike up rates in a bid to curb inflation.

However, statistics revealed by Capital Economics found that the rise would need to occur in the next two years to make fixing a mortgage now be cheaper than the cost of the average existing variable rate.

Paul Diggle, an economist at the firm, said: “We continue to think that the case for an immediate rate rise is weak. And even if Bank Rate were raised within the next few months, the chances of this signaling the start of a sustained round of tightening are slim. If we are right, then a borrower taking a fixed-rate now will find themselves paying considerably more over two years than those on variable-rate deals”.

Melanie Bien, of mortgage brokers Private Finance, said that “while predictions and forecasts are all well and good, the truth is nobody knows when interest rates are going to rise and by how much”.

She added that home owners need to assess their personal finances to see whether they can handle a rate rise before switching.