When recession hits, economic activity decreases. This means that the profits of businesses shrink, unemployment rises, and consumer spending plummets.
Given all the negative consequences of recession, the government employs various means to counter it and provide a boost to the economy. One of the measures it takes is to reduce interest rates. By reducing the ‘Bank rate’, the Bank of England allows more people to access credit, and thus stimulates spending. What does this mean for mortgages? Well, it depends on which type of mortgage you have (or are applying for).
Fixed rates mortgages
In a fixed-rate mortgage, the interest rate is set at the same percentage for the term of your mortgage. This can be a good or a bad thing, depending on when you decide to take it out. If taken out during a recession, a fixed-rate mortgage could potentially save you a significant amount of money as the low rate will be locked in for the coming years, and remain the same as the economy picks up again.
If you already have a fixed-rate mortgage when a recession starts, however, it’s likely that you’re overpaying on your interest rate. This is because the ‘Bank Rate’ is lower than the rate that you agreed with your bank in more prosperous times. If you find yourself in this situation, it’s worth speaking to a professional mortgage advisor – they may be able to renegotiate a new deal with your lender, resulting in a reduced mortgage term or lower interest rate.
Variable-rate mortgages
Predictably, the opposite pros and cons occur with variable-rate mortgages. Although there are different types of variable-rate mortgages (tracker, standard-variable rate, and discount), and they all follow the same logic, more or less.
Their interest rates mirror the performance of the economy; high in good times, low in bad times. This means that they can be attractive during recession – providing a relatively easy way to get a mortgage. When the economy starts to bounce back up, though, so too do variable-rate interest payments. If they’re not capped, this can get quite expensive. In addition, variable-rate mortgages tend only to have fairly short terms, meaning that it’s difficult to borrow larger amounts over longer time frames.
Which should I go for?
Regardless of which type of mortgage you’re looking for, it pays to have the assistance of an experienced mortgage broker. At IMC, our fully qualified advisors have been finding the best mortgage deals for South-West Londoners for over two decades. If you’re currently looking to buy a new property, get in touch to see how we can help.