Mortgage-holders take heed: the balmy days of low rates are numbered
If you want the certainty of a fixed-rate you had better get on with it, write Chiara Cavaglieri and Julian Knight. But there are other options
Sunday 13 February 2011
As far as Bank of England interest rates go, homebuyers have never had it so good. Rates were left on hold by the Monetary Policy Committee for the 23rd month on the trot on Thursday.
We are experiencing not only historically low rates of interest but also unparalleled stability. But nothing this good – from a mortgage holder's perspective – lasts for ever and it looks a racing cert that with inflation running away from the Bank's target range, rates will rise and soon. Last week, the Confederation of British Industry became the latest body to predict a rate rise.
"It does look like the inevitable rise in interest rates could come in the next quarter rather than the latter half of the year," says David Hollingworth of independent mortgage broker London & Country.
For borrowers already struggling with the recent VAT increase, rising inflation and wage freezes, this could spell trouble. Those who have been enjoying rock-bottom interest rates without overpaying on their mortgage or putting money away could be in for a financial jolt when their payments jump.
"Homeowners may be feeling nervous at recent reports of an increase in base rate. Although it is not clear when base rate will increase, customers who have chosen variable tracker deals or have stayed on their lender's SVR [standard variable rate] to enjoy low rates and repayments may want to consider switching to a fixed rate as soon as possible," says Louise Holmes of financial comparison website Moneyfacts.co.uk.
To some extent, expectations of an imminent rate rise have already been priced in. Lenders have been passing on soaring funding costs in the swap rate market to borrowers with fixed-rate mortgages at a six-month high, according to Moneyfacts. The average rate on a two-year fix is 4.49 per cent today, while five-year fixes are at 5.45 per cent, the highest rates since August last year. Some mortgages are up more than 0.5 per cent, which would add £42 a month to repayments on a £150,000 mortgage.
There are still some good fixed-rate deals to be had, however, and if rates are only going one way, experts say anyone looking to move on to a fixed rate should do so now. For a short-term fix there are several deals under 3 per cent, such as Santander's two-year fix at 2.65 per cent for up to 60 per cent LTV (loan to value), although this has a beefy £1,995 fee, and Ulster Bank's two-year fix at 2.75 per cent, also up to 60 per cent LTV with a smaller fee of £495 but exclusively for its current account holders.
Borrowers looking for longer term security can fix at 3.59 per cent for three years, with Mansfield Building Society up to 75 per cent LTV with a £999 fee, for example. Nationwide also offers a three-year fix at 3.69 per cent with the same fee and up to 70 per cent LTV.
"More borrowers are looking longer term, and there has been a definite movement towards three years and above because there is an element of unease amongst consumers, particularly those concerned about employment prospects," says Brian Murphy from independent financial adviser Mortgage Advice Bureau.
For five-year fixes, NatWest offers a best-buy rate of 3.95 per cent with a £699 fee, but again, this deal is only for existing customers with up to 50 per cent LTV. With lenders reserving the best rates for their own customers or those with big deposits, people coming to the ends of their mortgage deals having previously borrowed at a high LTV may find it tricky to fix at a decent rate.
Another sticking point is that fixed-rate mortgages often have hefty early repayment charges. It may well be worth paying this charge to save money in the long run, but borrowers are urged to calculate this carefully before deciding what length of fixed term to opt for.
As well as watching out for charges, borrowers wanting the peace of mind that a fixed-rate brings will have to pay a premium for this security. Looking at the best variable rates, both First Direct and Cheltenham & Gloucester have two-year trackers at 1.49 per cent above base rate, although the former is only for up to 65 per cent LTV, while C&G allows for up to 75 per cent.
As well as missing out on cheaper deals now, many borrowers may feel that with the economy still in a fragile state, when the base rate does start to rise it should be relatively slowly. Those with the flexibility and disposable income to cover potential rate rises may find that capped trackers are a useful way to hedge their bets. For example, Coventry Building Society currently offers a three-year tracker at 2.39 per cent above base rate up to 75 per cent LTV, which is capped at 4.39 per cent.
"Not many lenders have an appetite for capped trackers, but they do allow borrowers to benefit from the low rate environment with the protection of a ceiling should things get out of hand in the future," says Mr Murphy.
For those who think interest-rate rises are still some way off, it may be worth considering a tracker with a "switch to fix" or "drop-lock" option. These offer a sort of halfway house by allowing the borrower to enjoy cheaper rates now but jump into one of the lender's fixed deals without incurring any early repayment charges when interest rates start to creep up. Providers include Barclays, Nationwide and Royal Bank of Scotland. Another option is to mix and match products from the same lender so that part of the mortgage is taken on a fix and part on a tracker. This does carry its own risks, however, so it pays to speak to an independent mortgage adviser for help.
"The downside may be that a lender with a good fix is not so keen on tracker pricing or vice versa, and it's important to check whether there is a need to pay two arrangement fees or just the higher of the two," says Mr Hollingworth.
David Hollingworth, London & Country
"The speculation over interest rates has put significant upward pressure on market rates, and this affects fixed-rate mortgages. There has already been a spike in interest in fixed rates as borrowers decide that now could be the time to act and seek the shelter of a fix. I would expect that this will continue to be the case as a rate rise gets ever closer."
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