A rewarding time to get into a fix

The housing market is cooling, so the cost of borrowing may follow it down

With the City expecting interest rates to fall over the next few months, fixed-rate mortgages are starting to undercut conventional, variable-rate deals.

With the City expecting interest rates to fall over the next few months, fixed-rate mortgages are starting to undercut conventional, variable-rate deals.

The money markets are already pricing in lower rates: lenders can raise two, three and five-year funds for 4.60 per cent. This has led a growing number of banks and building societies to price their two-year, fixed-rate deals at 4.69 per cent, with Nationwide and Halifax offering deals at that rate. Alliance & Leicester has introduced a lower two-year fix, at 4.64 per cent.

The moves price short-term fixed-rate mortgages below the current Bank of England base rate of 4.75 per cent, and lower than most tracker mortgages. Alliance & Leicester, for example, has reduced the cost of its two-year, base-rate tracker from 4.79 per cent to 4.74 per cent.

Lenders are being prompted because economic data suggests that the next move for interest rates will be down. Ian Giles, the marketing director at Purely Mortgages, a broker, says that lower spending on the high street and a cooler housing market give the Bank of England more scope to reduce rates.

"The feelgood factor has disappeared so the pressure is on the Monetary Policy Committee to bring rates down," Giles says. As long as inflation remains below the Bank's target of 2 per cent, there is unlikely to be pressure to put rates up again in the near future.

A base-rate cut of 0.25 points is being predicted by a growing number of City commentators. This would bring base rates to 4.5 per cent, with a corresponding fall in the cost of trackers. Variable-rate mortgages may also fall, although this isn't guaranteed.

Several lenders have trackers pegged to, or even slightly below, the Bank's base rate. An interest-rate cut will bring the cost of these loans to below even the current, lower cost of fixed-rate mortgages. Abbey has a sub-base-rate tracker and Halifax has a rate close to the base rate.

In a couple of months, these mortgages, rather than short-term fixed rates, could be the cheapest on the market. However, there are no guarantees that they will stay that way, should the interest-rate climate change.

For this reason, some experts suggest that homebuyers should err on the side of caution and opt for a fixed rate if their funds are tight, or if they are stretching themselves.

"If you are on a tight budget, pick a fixed rate and lock in for two, three or five years," says Simon Jones, a director at brokers Savills Private Finance. "If you are on a tight budget, there is no question that it is sensible to fix." This protects buyers if the economy changes and rates rise.

Buyers who are looking for a longer-term fixed rate will, though, have to pay more for certainty. The most competitive five-year fixed-rate mortgages are currently at 4.89 per cent, which is above the current base rate.

Anyone locking in to a five-year fixed rate now could find that they lose out on any future falls in interest rates, although some home-owners will find that the premium is worth paying for long-term security.

And for buyers looking for almost total certainty, very long-term fixed rates of 10 years or more are starting to edge downwards too, with some deals available for about 5 per cent.

Long-term fixed rates have looked unattractive recently, because they were significantly more expensive than either shorter-term deals or tracker loans. But if lenders do manage to price mortgages with fixed-rate periods of 10 years or more at below 5 per cent, they could see an upsurge in demand.

The majority of home-owners, though, might prefer to bide their time, in order to see whether interest rates do fall further over the next month or two.

"If you can afford to take a little bit of a risk now, take out a tracker loan," says Simon Jones of Savills. "We do expect rates to start to fall."

Buyers should, though, check the terms of the deal for tie-ins. The best tracker mortgages have no redemption penalties, so a home-owner could switch to a fixed rate, should the City turn out to have misjudged the prospects for interest rates.

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Evening Administrator

    £8 per hour: Recruitment Genius: This Pension Specialist was established early...

    Guru Careers: Executive Assistant / PA

    £30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

    Ashdown Group: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Day In a Page

    Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

    Homeless Veterans campaign

    Donations hit record-breaking £1m target after huge gift from Lloyds Bank
    Russia's gulag museum 'makes no mention' of Stalin's atrocities

    Russia's gulag museum

    Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
    8 best workout DVDs

    8 best workout DVDs

    If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
    Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

    What is it like to live with Alzheimer's?

    Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
    The Internet of Things: Meet the British salesman who gave real-world items a virtual life

    Setting in motion the Internet of Things

    British salesman Kevin Ashton gave real-world items a virtual life
    Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

    Election 2015: A dead heat between Mr Bean and Dick Dastardly!

    Lord Ashcroft reveals latest polling – and which character voters associate with each leader
    Audiences queue up for 'true stories told live' as cult competition The Moth goes global

    Cult competition The Moth goes global

    The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
    Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

    Pakistani women come out fighting

    Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
    Leonora Carrington transcended her stolid background to become an avant garde star

    Surreal deal: Leonora Carrington

    The artist transcended her stolid background to become an avant garde star
    LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

    Education: LGBT History Month

    Pupils have been discussing topics from Sappho to same-sex marriage
    11 best gel eyeliners

    Go bold this season: 11 best gel eyeliners

    Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
    Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

    Cricket World Cup runs riot to make the event more hit than miss...

    The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
    Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

    Katarina Johnson-Thompson: Ready to jump at first major title

    After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future