Homeowner conundrum: To fix or not?
Another base rate cut would not bring relief to most mortgage-holders
Sunday 27 May 2012
How low could Bank of England interest rates go? Sitting at a tiny 0.5 per cent for more than three years, the only way the Bank rate was set to go was up. But then last week the International Monetary Fund, in its latest assessment of the UK economy, floated the idea that the next move in base rate could be down to 0.25 per cent or even zero to wrest the economy from a eurozone-sparked recession.
At first glance even a suggestion of a Bank rate cut should be good news for new borrowers and those looking to remortgage. But according to leading mortgage market observers this is far from the case.
"In terms of who would benefit I reckon about two million people on tracker mortgages linked to the Bank rate will see their repayments fall but for others it won't make any difference," says Ray Boulger technical director at broker John Charcol. "In fact it may have the opposite effect overall,"
In fact, Mr Boulger reckons for many existing borrowers a rate cut could do more harm than good. "There is a disconnect between the Bank rate and what people pay on their mortgages," he says.
"All a rate cut would do is squeeze the balance sheets of lenders further in the middle of the eurozone crisis and could actually lead to other borrowers having to support the tracker deals linked to the Bank rate through higher rates."
This disconnect between the Bank and mortgage rates is reflected in the recent rise in many lenders' standard variable rate mortgages.
"We are seeing rates go up, not down," says David Hollingworth from broker London & Country. "SVRs have been increasing and criteria tightening, while fixed-rate deals have also got more expensive.
"It would be a very unwise strategy to wait for any Bank rate cut to turn this around. First, I can't see a Bank rate cut and second, if it happens it probably won't make any difference to the pay rate on most mortgages."
The major rogue element is the eurozone crisis, which could see a host of European banks having to be bailed out in the near future. This is already having an effect on the rates on offer.
"Mortgage rates are on the up and there is little to suggest this will change in the near future," says Clare Francis, a mortgage expert at comparison site MoneySupermarket.com. "There is already evidence that the eurozone crisis is affecting the willingness of banks to lend to each other and this will bump up the cost of wholesale funds, which in turn affects the price we pay for mortgages."
So with rates edging up and huge uncertainty over the euro, is this time to fix? The answer it seems depends on your attitude to risk and whether or not you are willing to pay a little extra, a bit of a premium, in order to know what your repayments will be two, three or five years hence.
"Mortgage supply still isn't meeting demand, which means prices have been going up, but fixing still comes at a little extra cost. But the premium now is quite low," Mr Boulger says.
For instance, the best-buy new tracker rate mortgage according to London & Country is HSBC's no-fee product, which is 2.79 per cent above base rate for life (equivalent to 3.29 per cent). Meanwhile the best-buy five-year tracker as of Friday is 3.79 per cent from the Yorkshire Bank.
That's a premium of 0.5 per cent for fixing for five years. Two-year fixed deals are even cheaper with the best buy from Royal Bank of Scotland coming in at 2.99 per cent but that is with a maximum loan to value of 60 per cent.
But two-year fixed deals don't look great value at the moment, observes broker Colin Payne from Chapelgate Associates: "It wouldn't surprise me with the current turmoil in the eurozone that Bank rate remains at this level for the next three years."
As a result, anyone opting for a short-term fix – two or three years – could find they come out of their deal just when rates are on the up, meaning a more expensive remortgage.
Despite this, Mr Boulger believes that borrowers preferring to wait to see what happens next will not lose out too much. "The higher the rate you are paying now the more merit in switching to a fixed rate, but if you do wait, then I think that a Greek exit from the euro is already factored in to mortgage rates. So the risk of you paying more to fix down the line may be worth taking."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 1 Stem cells that can kill cancer have been engineered by scientists
- 2 Ricky Gervais and Dame Judi Dench back campaign to stop Thailand dog meat trade
- 3 Russell Brand says he will 'probably' give up acting to focus on his revolution
- 4 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 5 Queen's first tweet: Reply telling Her Majesty to 'f*** off' broadcast on BBC News
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Tony Blair 'says Ed Miliband will lose 2015 general election'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Putin: The US is to blame for almost all the world's major conflicts
Attacks on 'Ukip Calypso' show how skewed people’s priorities are
iJobs Money & Business
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village