Borrowers are lured away from the fix: Despite rising rates, Vivien Goldsmith says nimble buyers can still find bargains

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The Independent Online
HOME buyers are moving away from fixed-rate loans as interest rates rise and into variable-rate mortgages.

But the rises in fixed rates are because the money markets are predicting that rates are going to rise steeply.

David Knott, director of treasury at First Mortgage Securities, said: 'If the cost of money over a five-year period is 8.25 per cent, and in the first year it is 5.875 per cent, then the expectation is clearly that in the next four years rates are going to be much higher - 9 or 10 per cent.'

But not all market-watchers believe that the market is giving an accurate prediction. Steven Bell, economist at Morgan Grenfell, says rates have been pushed artificially high because of the big demand from building societies to hedge their fixed-rate books as rates began to rise.

'With five-year rates at 9 per cent it is a very tricky decision. When they were below variable rates it was easy. It was worth paying for certainty. But some recent offers are too expensive. There will be better deals. I would hold off.'

Borrowers are being lured into taking out variable-rate loans by the generous cash- backs on offer - refund of valuation fee plus a cash sum in some cases. But if rates rise, the fixes on offer now could still look like a good deal - even though they are considerably above the rates at the beginning of the year.

Building societies in theory can have up to 40 per cent of their lending financed through the money markets. This is the source of fixed-rate funds. Savers are not keen to fix their rates while rates are perceived to be low. So funds from the public back floating-rate loans.

The building societies' regulator, the Building Societies Commission, has warned about the dangers of signing up large numbers of fixed-rate loans that come to an end at the same moment. There is a risk that if rates rise borrowers will face 'payment shock' as their monthly payments rise steeply at the end of the fix, and the lender could face large-scale arrears that could threaten the stability of the society's balance sheet.

So societies have been marketing small portions of fixed-rate money, which is why a rate may be advertised one week and withdrawn the next. Yorkshire said it was loath to publicise its fixed rates as it knew they would not be available for long. The game of finding the best fixed rate as rates rise is to find the offer that has been around the longest.

Many lenders have decided to keep offering a full range of fixed rates even though demand has eased off. George Haslem, mortgage manager at National & Provincial Building Society, said buyers now believed the five-year rates were too high and more people were opting for a fix for two or three years.

'We are getting to the stage for the first time when three-year rates are going up above variable rates. N&P's variable rate is 7.64 per cent, while the three-year fix is 7.75 per cent.

But nimble buyers can still find five-year money at only a shade more.

Anne Gunther, controller of mortgages at National Westminster Bank, said the banks had an advantage over societies in fixed rates as they are not subject to the wholesale limits, and mortgages form a small percentage of their business.

'We take the view that it is still a good idea to consider going into a fixed rate. Budgetry certainty lasts longer than a discount. There may be a deep discount for one year, but there will be harsh redemption penalties for perhaps two years after that. It doesn't offer too much flexibility.'

Bill Martin, UK economist at UBS, believes interest rates are about to rise steeply. He is predicting mortgage rates at 8 per cent by the end of the year and at 10.75 per cent by the end of next year as inflation begins to rise.

Roger Bootle, chief economist at Midland Bank, swims against the tide of opinion that rates are poised to rise. He believes the sluggish recovery in the economy and the absence of any rise in inflation will lead the Government to cut rates further - possibly in late June or early July or in September or October.

'Markets have been unduly influenced by what has happened in America. The economy there is in very different shape, and the rise in February in the US has not stopped Germany cutting its rates.'

----------------------------------------------------------------- FIXED-RATE MORTGAGES ----------------------------------------------------------------- Five-year and nearly five-year fixed rates Lender Rate % Date Fee (pounds) Max % FMS 7.85 31/1/99 275 75 Lloyds Bank 7.99 31/5/99 250 95 N & P 8.45 31/3/99 250 95 Alliance 8.99** full 5 yrs 0 90 & Leicester 8.49 full 5 yrs 0.5%*** 95 NatWest 8.59 April 99 250 90 TSB 8.95 31/1/99 250* 95 Nationwide 9.09 full 5 yrs 295 85 9.29 full 5 yrs 295 95 Halifax 9.25 31/8/99 250 95 Skipton 9.75 31/5/99 250 95 ----------------------------------------------------------------- * pounds 50 for first-time buyers. ** Cash back, up to pounds 440 for valuation plus pounds 260 after completion. *** Maximum pounds 300. -----------------------------------------------------------------

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