How to get in - and out of - a fix

Mortgage-rate deals may look good now but could turn ugly in the long term, warns Helen Monks
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The Independent Online

The mortgage market has seen a flurry of activity this week, With lenders pushing out the most competitive fixed-rate deals seen for months. This sounds like great news for borrowers, who earlier this year would have expected to pay rates loaded by up to an extra half a per cent for the security of knowing their rate was fixed.

The mortgage market has seen a flurry of activity this week, With lenders pushing out the most competitive fixed-rate deals seen for months. This sounds like great news for borrowers, who earlier this year would have expected to pay rates loaded by up to an extra half a per cent for the security of knowing their rate was fixed.

But it could be that lenders are attempting to snare customers into deals that look strong now, but may well be thrown into sharp relief in the near future if, as widely predicted, it turns out that interest rates have peaked.

Many commentators believe the Bank of England base rate, currently 4.75 per cent, has reached its height in this cycle. Although the base rate could touch 5 per cent, a number of economists expects rates to stabilise or come down in the not-too-distant future.

At the start of the month, Halifax's chief economist, Martin Ellis, commented that interest rates, while they have risen, seem likely to have peaked close to current levels. Capital Economics, too, believes rates have reached their highest and expects the next rate move will be downwards. It anticipates by the end of next year that the base rate will be about 0.5 per cent lower, emphasising that rates are not in danger of bouncing up to the 6 to 7 per cent levels.

The Bank of England left interest rates on hold this month for the third month in a row, following five increases, which appeared to have slowed the housing market. Some market-watchers say the housing market is at the beginning of a fairly substantial correction. It expects prices to fall 20 per cent from their current levels during the next two to three years.

Latest evidence shows prices are coming down. The property website rightmove.co.uk found asking prices fell by 1.7 per cent in the month to mid-November, with annual inflation falling from 13.4 per cent to 11.6 per cent. When prices fall, this can put pressure on the Bank of England to cut rates. But the Governor, Mervyn King, says further rate rises cannot be ruled out, depending on what the key economic indicators, such as GDP growth, inflation and house prices, tell his Monetary Policy Committee in the coming months.

In addition, Nationwide senior economist Kerry Hanson says: "We still think there is a chance of one more rate rise, probably in February to May."

On the face of it, then, it sounds crazy to fix your mortgage rate when rates are expected to start coming down within a few months. But that has not stopped several building societies and other lenders from launching a string of fixed-rate deals in recent weeks.

When shopping around for your mortgage and comparing fixed and variable deals, borrowers should always expect to pay a premium for security, and the longer the fixed-rate lasts, the higher that premium will be. David Hollingworth, a mortgage specialist at the independent mortgage broker London & Country, says: "Whether to get a fixed or variable deal is probably one of the most important decisions a borrower can make. Now, the choice will largely depend on whether or not you feel interest rates have peaked, and are confident enough that rates might come down - meaning you are willing to go for a tracker or discounted mortgage."

If you are the sort of borrower who does not like to take chances and will always go for a fixed deal, Mr Hollingworth says that over the summer, two-year fixes carried rates of up to 5.25 per cent, whereas now it is possible to get a 4.69 per cent home loan from Portman Building Society, and Universal Building Society is selling a two-year fix at 4.75 per cent. For five-year terms, Newcastle Building Society and Alliance & Leicester are offering two-year fixes at 4.99 per cent. And longer-term deals are looking more attractive. Norwich and Peterborough Building Society has a 10-year deal at 5.38 per cent, while Britannia Building Society has a similar mortgage at 5.39 per cent.

But is now the moment someone, say, on the verge of rolling on to a standard variable rate at their lender after their current fixed offer runs out, should be choosing another fixed mortgage? Arguably not, say some experts. The independent mortgage adviser Savills Private Finance is among those that believe there is still room for fixes to fall even lower. For anyone whose fix is due to expire shortly, it reckons it might be worth hanging on for a few weeks longer before remortgaging, as new and more competitive deals seem to be coming on the market regularly. Also, swap rates - which govern the level fixed deals are set - appear to be coming down following an upwards blip, so it is not unreasonable to expect rates to come down on this evidence alone.

Melanie Bien, head of media relations at Savills Private Finance, says: "For some people, a fixed rate will always be better, because they prioritise certainty, but if you fix now, you might be looking at paying over the odds." In the main, Savills currently prefers trackers, favouring its own exclusive deal at 0.51 per cent below base, giving a rate today of 4.24 per cent.

Borrowers are right to be mindful of attention-grabbing rates and consider waiting a little longer before committing to long-term deals. But if your current deal is about to expire, and you are thinking about waiting to see if rates come down further before switching, be careful you don't leave it too long. The benefits of getting a marginally better rate may be mitigated by the cost of paying a standard variable rate for a few months.

'It's worth it for the security'

Rachel Brunning, 35, and computer programmer Mark Pickett, 39, are in the process of switching from Alliance & Leicester to Nationwide to take a five-year, fixed-rate mortgage at 5.49 per cent.

Mark has an older daughter, and he and Rachel have two young daughters under five. Rachel wants to spend the next five years being a mum, while studying criminology through the Open University.

The couple did not take long to decide they wanted to fix their rate. Rachel says: "We may end up paying a little bit extra than we might have needed to, but it's worth it for the security of knowing exactly how much our mortgage will cost over the next few years, when we will only have one income."

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