An interesting question. When you take a fixed rate deal you are gambling on the average variable rate you would have paid being equivalent to the fixed rate. Let me explain.
Let us imagine a £100,000 interest-only mortgage, with the choice of 3% variable or 4% fixed, with a 2-year special rate. In this example, after 1 year the variable rate jumps by 2%, to 5%.
At 4% the interest-only payment is £4000 each year, a total of £8000. The variable rate payment is £3000 in the first year, then £5000 in the second year - also a total of £8000. In other words, the average interest rates are identical. So how do you choose between them? Just compare the interest rates of a variable rate loan and a fixed-rate loan over the same period. Then double the difference between them, and if you think that interest rates will not rise by that much, then the variable loan is likely to be better. In the example given the difference was 1%, and the rates would have to rise by over 2% for the fixed rate loan to be the better bet.
Now this is a simple example, but the principle is correct, assuming a uniform rise in rates. The question is: would it make sense..... and the answer must depend upon your need to stabilise your finances, how much you could bear a rise in mortgage costs in the short term, and your view on interest rates in general.
Let me also stress the importance of considering the rates that will be imposed following the fixed rate period. If the rate is a competitive one, then you should not have to remortgage, but if the rate is poor then, as you have said, you may wish to remortgage but be unable to because of house values or your own financial position. To be on the safe side, though, do work through the position should mortgage rates have risen a few percent at the end of the special rate - can you afford it?
| 01.12.11 @ 00:54