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."
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