Buyers' mortgage dilemma

The choice between variable and fixed-rate is currently extremely difficult. Stephen Pritchard reports

The last few weeks have seen slight falls in mortgage rates from leading lenders, and City economists believe that the UK interest rate cycle is at, or near, its peak. Even pessimists predict perhaps just one further rise in base rates, before they start to drift down again.

The last few weeks have seen slight falls in mortgage rates from leading lenders, and City economists believe that the UK interest rate cycle is at, or near, its peak. Even pessimists predict perhaps just one further rise in base rates, before they start to drift down again.

For home-buyers, this poses a difficult question. Is it best to opt for a variable mortgage, accepting that rates may rise before they start to fall, or is it better to pick a short-term fixed-rate mortgage?

After a period when it was hard to find much choice of mortgages below 5 per cent, several building societies and banks have two-year deals below that level. Moreover, the premium that lenders demand for a two-year fixed-rate mortgage over a variable rate loan is also low.

Yorkshire Building Society is offering a two-year deal at 4.69 per cent; Derbyshire, through the broker Charcol, is lending at 4.6 per cent.

Among the majors, Moneyfacts lists a two-year fixed-rate mortgage , until 1 January, 2007, at 4.69 per cent with Northern Rock. Nationwide's two-year fixed-rate mortgage is 4.95 per cent, with flexible features, and Halifax comes in at 4.99 per cent.

According to Ray Boulger, senior technical manager at Charcol, any two-year fixed-rate mortgage between 4.9 and 5 per cent is reasonable, but not especially competitive in the current climate.

But a two-year fixed-rate mortgage remains a cheaper option than a five-year deal, and it also keeps the door open to remortgaging, if rates do start to fall again.

Looking at longer-term mortgage rates gives some clues about the trend. Five-year fixed-rate mortgages have started to edge down in line with longer-term money-market rates. On the money markets, the yield curve is currently flat. The "swap" rates used by banks in the wholesale money market show a difference between two-year and five-year swap rates of just eight basis points (0.08 per cent).

This is not yet fully reflected by mortgage rates, however. Charcol calculates that the difference between a two-year mortgage and a five-year mortgage averages 30 basis points (0.3 per cent), with only a handful of lenders offering five-year deals at below 5 per cent.

Charcol has just launched a five-year rate of 4.94 per cent, with Derbyshire Building Society. Stroud & Swindon's five-year rate is just above the 5 per cent mark, at 5.05. But the mortgage has a free valuation, so it might work out cheaper for homeowners taking out a smaller loan. Unless a buyer has a pressing need for certainty, though, the differences in interest charges mean that they are likely to be better off taking out either a two-year fixed-rate mortgage or even a variable-rate loan, rather than committing to a five-year deal.

"Base rates will start to fall in the second quarter of next year. I believe they have peaked," says Mr Boulger. "Economists are forecasting rates of between 4.5 and 4.75 per cent. If you take a two-year mortgage now, you should be able to lock into a new mortgage that is at or below that rate."

He cautions that borrowers who take out a five-year fixed-rate mortgage could even find that mortgage costs are on the rise again, when their fixed deal ends. This, combined with the current higher costs of a five-year loan, makes them a less attractive option.

As an alternative, home-buyers who are very bullish on interest rates could opt for a variable-rate deal now, with a view to switching if rates do come down further.

Abbey has a two-year tracker at 0.3 per cent below base rates, although the maximum loan is limited to 60 per cent of the property's value. First Active has a three-year tracker mortgage, set at the Bank of England's base rate of 4.75 per cent.

For buyers who believe the economists' predictions, this is a relatively low-risk option. "If you get it wrong, the most you will be adrift of the best rates is 0.25 per cent," says Mr Boulger. But he cautions that the most competitive tracker mortgages have tie-ins during the discounted period, so they do not offer much more flexibility than a two-year, fixed-rate deal.

"A two-year fix buys you peace of mind and security," he says. "And you are not now paying such a big premium over a variable rate."

Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Kellie Bright as Linda Carter and Danny Dyer as Mick Carter

EastEnders Christmas specials are known for their shouty, over-the-top soap drama but tonight the show has done itself proud thanks to Danny Dyer.

PROMOTED VIDEO
Arts and Entertainment
Call The Midwife: Miranda Hart as Chummy
tvCall the Midwife Christmas Special
Sport
Laura Trott and Jason Kenny are preparing for the Commonwealth Games in Glasgow
sport
Arts and Entertainment
Sir Bruce Forsyth with Tess Daly in the BBC's Strictly Come Dancing Christmas Special
tvLouis Smith wins with 'Jingle Bells' quickstep on Strictly Come Dancing's Christmas Special
News
news
Arts and Entertainment
tv
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there