Get your fix before mortgage lenders close ranks
Banks are cracking down on the low rates that have kept mortgage repayments so low. It's time to grab a fixed deal – and quick
Saturday 20 June 2009
Borrowers have been urged to grab good fixed rate mortgage deals before they disappear. Last weekend, Nationwide raised its fixed rate mortgages by up to 0.86 per cent. Lloyds and Halifax followed on Monday with leaps of up to 0.7 per cent with Abbey and Alliance & Leicester acting on Tuesday with increases of up to 0.5 per cent.
According to the latest figures from the Council of Mortgage Lenders, seven out of ten borrowers chose a fixed rate mortgage in April. But, as our table (right) shows, average rates have climbed by around 0.2 per cent since the beginning of the month and look set to go higher after this week's increases.
Melanie Bien, director of independent mortgage broker Savills Private Finance, says: "Lenders have started to raise their fixed rates on the back of a jump in funding costs. Fixes are already looking more expensive than they did a few weeks ago but if you have not yet secured one it is not necessarily too late to get a competitive rate as long as you move quickly."
The hike in fixed interest mortgage rates has been blamed on rising Swap rates – the rates that lenders use to fund their borrowing. Nici Audhlam-Gardiner, director of mortgages at Abbey and Alliance & Leicester says: "Swap rates have increased substantially in May and June and, in particular, last week. Until now, we have absorbed the cost of these increases to protect borrowers. However, following competitor moves and further Swap rate increases, it has become necessary to increase the rates on some of the deals we offer."
It seems a reasonable assumption that all fixed rate mortgages will rise in the next few days if they haven't already, but does that mean you should secure a deal as soon as you can? That depends on your current situation. If you're already in a deal and there is a penalty clause to get out of it, the savings that you might make by getting a fixed rate now are likely to be outweighed by the penalty charges of redeeming your existing mortgage early. So you would probably be better off waiting until you are penalty-free before switching, even though you may end up having to pay a higher rate for the next couple of years.
However, if you've delayed switching from a standard variable rate until you see some signs that the market is settling down, then now could be the time for action, says Andrew Hagger of moneynet.co.uk.
"For those customers who have remained on their lender's SVR rate hoping to get in at the bottom of the fixed rate market, they'll need to get a move on or risk missing the boat," he warns. "The most competitively-priced deals won't be around for long as the banks will only have a limited tranche of funds to lend at these rates. As the better offers start to get pulled, so the scramble will intensify as more borrowers rush to chase fewer deals."
It may seem counter-intuitive to move from a low rate to a higher one, but that could prove a wise move in the long-term, especially if the bank base rate starts to climb later this year, as is expected. "There are a lot of borrowers on very low rates due to the base rate being at 0.5 per cent since March, and they will probably continue to enjoy those rates for a few more months," points out Peter O'Donovan, head of mortgages at Bestinvest. "The fixed rate market though is starting to move, which could be a bad sign for those variable rate borrowers trying to decide the best course of action. Do they stay low for a few more months or move across to avoid a huge increase in the future having missed out on the really low deals?"
He says five-year fixed rates could prove to be the best deals for some borrowers. "As it is six months since the Bank of England cut the rate to 3 per cent people have got used to their artificially-low rates and it is a difficult decision to swap a 1 per cent rate to 4.8 per cent. However, over five years the higher rate will probably be more cost-effective. People tempted by lower-rate two- and three-year deals will probably find themselves having to take a bigger increase when those deals expire, along with yet another set of fees."
Louise Cuming, head of mortgages at moneysupermarket.com agrees that anyone rushing to take a two-year fixed rate now could be making a costly mistake. "A two-year fixed rate product could be a potential time bomb," she warns. "There is a real drive for a low rate environment currently, but with such historically low rates, the only way for them to go over time is up! The end of a two- year term could well coincide with a much higher rate environment."
Ed Bowsher, head of consumer finance at Lovemoney.com, is positive about fixed rates. "In spite of the recent rate rises, I still think that fixed rate mortgages are the way to go in the current market. Most people should crack on now and get a good fixed rate deal before they go. While the main driver for the rate on fixed rate mortgages is Swap rates, they're not the only factor pushing up mortgages rates. Fixed rates are also rising because banks are keen to boost profits and repair their ravaged balance sheets. What's more, there are fewer banks competing for our business now, which means there is less pressure on the lenders to offer really competitive mortgage deals."
But Louise Cuming says that the rising fixed rates shouldn't necessarily make borrowers rush to take one out. "Fixed rates are not necessarily best for everyone. For those looking for peace of mind and borrowing to the maximum levels, fixed rates will give them certainty. But for those not in that position, tracker rate products should not be overlooked, especially given the fact they can often come in at a much lower rate initially. Overall, no-one has a crystal ball, but it is very important to understand the risks – as well as benefits – of the products and apply them to your individual circumstances," Cuming says.
Trackers are an option, of course, but as the base rate rises, so will your mortgage. It means it's essential to look carefully at the tracker rate, advises Melanie Bien. "There are base-rate trackers available, but watch out for the margin above base rate. For example, Woolwich has one at 3.99 per cent above base rate for the term of the deal, available to those with a 20 per cent deposit, but while the pay-rate is currently 4.49 per cent, if base rate rises rapidly next year back to the usual level of around 4 or 5 per cent, you could end up with an unaffordable rate."
Homeowners with more equity in their homes can qualify for better mortgage rates. For that reason Bien suggests that borrowers consider switching cash out of savings account into paying off their property as the savings could easily be worth more than the interest earned on the cash. "Those who have little equity in their homes will pay higher rates than those with a comfortable equity cushion, so it is worth checking whether you have any cash sat in a savings account earning a poor rate of interest that you could use to pay off a chunk of your mortgage and therefore qualify for a more attractive rate. However, make sure you don't use cash that you may need at a later date as it will be difficult to access it again," she warns.
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