It is certainly true that we are living through an interesting period. Stagnating wages, low economic growth, declining levels of home-ownership and high levels of personal debt, the lingering effects of the credit crunch, highly polarised politics, Brexit, and many other things are pointing to significant challenges ahead for our society and our economy. Some of these events and developments could well lead to interest rate changes, both up and down.
However, we always live in uncertain times. In the summer of 2007, hardly anyone realised that the credit crunch was upon us – it was here, the foundations were all in place, but we were still a month or two away from beginning to experience it. When the stock market peaked at the end of December 1999 we were living in uncertain times, as anyone who invested in that month would have painfully discovered only a month or so later.
With the value of hindsight, it is easy to say ‘yes, of course, that was the cause, that was the start, that was the issue’, but as we live through the times, the issues are rarely as obvious.
So, what has this to do with the appeal of variable interest rates? Indeed, does it not actually underline the value of fixing your rate? Well, for some, yes. If someone is risk averse, or has constrained affordability, or is determined to remain in the mortgaged property for many years, then a fixed rate could well be the right choice.
The point though is that given that life is uncertain, and things can change overnight, the value in trying to predict the future is limited. Instead, I believe it is better to concentrate on what is certain or known or predictable. The closer to home you look, the more likely it is that you will find clarity.
So, for example, does a client have very constrained affordability which means they cannot risk an upwards rate change, or do they have reasonable affordability? Do they think they may move-house soon, meaning that Early Repayment Charges are unwise and that relying on an ability to port puts too much reliance on the goodwill of the lender? Does their credit file or volatile self-employed earning potential point to wisdom in a lifetime tracker or discount, given that they might not be able to remortgage again for some time?
Clients will very often be overwhelmed by the macro environment. A good advisor will acknowledge the economic backdrop but will keep steering their client back towards focussing on their own personal needs and circumstances and away from crystal ball gazing. They will also point out that variable rates are often the cheapest option, even maybe after a rate increase or two. When the external ‘noise’ is removed, variable rates far more obviously have their place. I therefore encourage you: don’t discount the discount.
This article was written by Furness Building Society
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