To fix or not to fix. Borrowers must choose as rates rise
Banks expect to pay more for money, and that's driving up mortgages.
Sunday 14 June 2009
Homeowners are being urged to get in quick and seal a fixed-rate mortgage deal, after experts warn rates are set to rise sharply.
Several of the big players have already made the move, including Nationwide, which increased rates by up to 0.86 per cent on all its fixed mortgages on Friday, but other lenders are set to follow suit. "We have seen swap rates rise in the last month or so, pushing up the cost of fixed-rate mortgages quite sharply," says Ray Boulger, from mortgage broker John Charcol.
The reason the money markets are getting twitchy is continuing worries over the amount of bonds issued by the Government to support its debt. "Longer term, the explosion in government debt is going to mean higher interest rates and the money markets are starting to price such rises into their equation," Mr Boulger says.
This advice comes after new figures from the Council of Mortgage Lenders revealed a surge in popularity for fixed-rate home loans, with the number of borrowers taking one increasing to 69 per cent in April. The argument being put forward for fixing now is based on the understanding that lenders will increase prices imminently because of the soaring "swap rates" – the level at which lenders pay for wholesale borrowing on the money markets and then use to set fixed-rate products.
Higher fixed-rate deals cause even more concern for first-time buyers who are still being kept out of the market, according to new figures from price-comparison service Moneysupermarket. The figures show that the number of products available at 90 per cent loan-to-value (LTV) has fallen by 97 per cent since January 2007. Over the same period, despite the base rate falling to 0.5 per cent, rates on 90 per cent LTV deals increased from 1.2 per cent to 5.73 per cent above base rate.
Prices on fixed home loans are rising, but interest rates on other mortgages are expected to remain stable until next year at least, so is now really the time to fix? Borrowers who have decided they want to secure a fixed home loan should act before rates rise any further, but one of the first things to consider is whether they will incur any penalties by switching to a new deal. Those coming to the end of an expensive, long-term fixed rate are still likely to significantly reduce their mortgage costs by switching to a new fixed deal so, again, acting quickly makes sense. But homeowners enjoying a low variable rate will face a much more difficult decision. "For those on a rate which is nice and cheap now, this is going to a much harder pill to swallow," says Richard Morea of broker London & Country.
The decision will depend largely on attitude to risk and desire for security. Borrowers paying little will have to decide whether they want to risk sitting tight on their current rate and securing a fixed-rate deal later, when rates could be much higher. Some may choose to pay more for their mortgage now with a fixed-rate deal, hoping to avoid sharp increases in the future.
"The risk is trying to predict how long the Bank of England is going to keep interest rates as low as they are, and timing a change to a fixed-rate deal before they do go up or before mortgage providers put their fixed rates sky high in anticipation of base rate increases," says Darren Cook from the financial information service Moneyfacts.
The wait-and-see strategy can be a precarious one – particularly for those with an equity issue. Homeowners may find that if they wait to secure a fixed-rate deal and house prices fall they are left with a high LTV ratio and so are unable to access the most competitive deals. They may even be locked out of a new mortgage deal altogether.
The question of how long to fix for is another conundrum, and again the answer is dependent on the attitude to risk. The good news is that the margin between rates on three-year and five-year fixed deals and the traditionally cheaper two-year fixed deals has shrunk. "There is no longer such a premium to pay for longer-term security," says Mr Morea.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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