Over recent months, my unwavering advice has been to fix at least a portion of the interest that you pay on your loans / mortgages in anticipation of increases in base rate. But in the light of recent steep increases in the fixed rates, is that advice still valid?
To put this in context, until the “bonkers budget” of 23rd September 2022, both fixed and variable rates had been slowly climbing. Variable rate (until 22nd Sept) was 1.75% and a 5 year fixed rates were c. 4% for buy to let and c. 6% for commercial mortgages.
Currently Bank of England base rate is 2.25% (likely to go up to c. 3% ). Five year fixed rates are currently c. 6.75% for buy to let and c. 9% for commercial mortgages. So the gap, between fixed and bank base rate has increased from c.2.25% (buy to let) to c. 4.5% (or 3.75% if base rate goes to 3% next week.)
So why is this? The answer lies in the different mechanisms that drive these rates. Base rate is set by the Bank of England, motivated by economic factors including a desire to control inflation. Fixed rates are driven by the price of government debt (“bonds” or “gilts”) which in turn impacts the City “swap” rates which lenders use to fix their interest rates. The cost of government bonds increased sharply after the Truss budget on 23rd September as her plans were deemed by the city to be unaffordable.
So the cost of fixed rates is impacted directly by how well the government is seen to manage our counties national debt, and whether its plans are considered “prudent” by investors and the city.
The current election of a new conservative party leader is now driving some of the governments borrowing costs. Indeed the possibility of a new Johnson premiership drove rates higher last week, whilst today with Boris pulling out, government borrowing rates have dropped again. Overall, 5 year government borrowing rates are about 0.5% down from their heights, and it is possible that they will come down a little more if the city deems a new PMs policy to be more prudent. The recent drop in these rates has yet to be reflected in the 5 year fix rates offered by lenders, who appear to be holding off making changes until volatility dies down in the market.
So my thoughts are, refrain from fixing right now, and see if the fixed rates drop a little in the coming weeks. This is a strategy that carries some risk of course but you can see that the gap between fixed and variable rates does seem higher than previously and perhaps this will shrink somewhat in the coming weeks.
Please note that this is not intended as specific advice for any one person or company and you should always seek your own bespoke advice which will vary according to your circumstances.