A rewarding time to get into a fix

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

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.

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