Although a few uncertainties have been removed from the political landscape in recent days – hail Empress Regnant Theresa May – it would be a mistake to think that normality has now returned to the financial world. Far from it. Uncertainty rules.
Sterling still treads the low – rather than the high – paths while the outlook for the economy remains at best fragile. The UK stock market may have risen like a phoenix and soared – eagle like – to an eleven month high with May’s imminent arrival at Number 10 but it still remains prone to ‘shocks’. Don’t rule out further short sharp corrections before the summer is out (did it ever start?) to send our pensions and ISAs into temporary freefall.
Thursday may see a little electric ‘shock’ treatment administered by Mark Carney, governor of the Bank of England, with the base rate cut in half to 0.25 per cent in order to stimulate the economy. If not this month, then the volts from Carney’s Threadneedle Street battery will fly in August – especially if the economy continues to demonstrate bouts of Brexit blues.
Against such an uncertain economic and financial backdrop, the temptation is to pull up the drawbridge, batten down the hatches, forgo the summer holiday and wait for the storm clouds to be blown away by May, her new Chancellor of the Exchequer and her merry band of Cabinet men and women. Financial hibernation, it seems, is the order of the moment.
Yet not all is lost. Although the art of deposit saving (squirreling) has been derailed by low interest rates – blame the banks and building societies as much as Carney – there are some simple financial steps you can take to protect yourself in the months ahead.
The biggest leap you can make is to take control of your mortgage – not just for the upcoming tough months but for the rest of the decade and beyond. That is, until post the next election but not quite to infinity and beyond.
I’ve never particularly been a keen fan of 10-year fixed-rate loans but I think their moment might well have just arrived. Irrespective of what Carney does to the base rate tomorrow (slash and burn, or stick), now is the time to consider whether you want to build long term mortgage cost certainty into your household finances.
Although it’s a fast moving market, with rates being tickled down all the time, you can now get a competitively priced 10-year fixed-rate mortgage for anything between 2.39 per cent (Coventry Building Society) and 2.79 per cent (HSBC and West Bromwich Building Society). Yes, there are cheaper five-year fixed rate mortgages out there (some priced as low as 1.99 per cent) but the ‘premium’ for locking in for an additional five years is as attractive as it will probably ever get.
Just think, you will be locking into a rate that will not rise until 2026 – and who knows what is going to happen in the next 10 years. A Labour Government (God forbid) in 2020? An end to low interest rates in the wider economy (highly probable)? The return of inflation? We just don’t know.
Like all financial products, 10-year fixed-rate mortgages are not without their naughty bits. The best rates are reserved for those with big deposits or a humungous slab of equity in their home. Indeed, if you haven’t got a big deposit or mighty slab of equity they are not really worth considering because the rates ratchet up to north of 4 per cent.
For first-timers they are a non-starter – they are better served by a shorter term fix (two or three years) which they can allow to run its course before hopefully remortgaging to a loan with a more attractive rate (based on a lower ‘loan-to-value’).
The arrangement fees can also be daunting (£1,000 is not atypical) while early repayment charges (often pernicious in the early years) need to be fully understood before you sign on the dotted line. If you don’t think you are going to stay in your home for at least five years, then a 10-year fixed-rate loan is not for you.
Maybe, you’re mortgage-free (good for you). Maybe you don’t have sufficient equity in your home (if so, I’m sorry I have wasted your time). Maybe you don’t feel comfortable fixing for longer than five years (I fully understand).
But maybe, maybe, a mortgage with a rate fixed for 10 years could now be right up your street.
Time I think to ring your mortgage broker and find out a little more. Certainty in an uncertain world.
Jeff Prestridge is Personal Finance Editor of The Mail on Sunday
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