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.

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.

News
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
science
News
Richard Dawkins dedicated his book 'The Greatest Show on Earth' to Josh Timonen
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Extras
indybest
PROMOTED VIDEO
Travel
Dinosaurs Unleashed at the Eden Project
travel
Arts and Entertainment
music
Sport
football
Life and Style
This month marks the 20th anniversary of the first online sale
techDespite a host of other online auction sites and fierce competition from Amazon, eBay is still the most popular e-commerce site in the UK
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

    £45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

    Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

    Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

    AIFMD Business Analyst / Consultant - Investment Management

    £450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

    Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

    £450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
    eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

    eBay's enduring appeal

    The online auction site is still the UK's most popular e-commerce site
    Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

    'Lack of ethnic minority and black faces on TV is weird'

    Culture Minister Ed Vaizey calls for immediate action to address the problem
    Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

    Magic circles: Artist Olafur Eliasson

    Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
    Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

    Josephine Dickinson: 'How I discovered a new world of sound'

    After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
    Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

    Greggs gives lesson in crisis management

    After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
    Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

    Matthew McConaughey sings the praises of bumbags

    Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
    7 best quadcopters and drones

    Flying fun: 7 best quadcopters and drones

    From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
    Andy Murray: I quit while I’m ahead too often

    Andy Murray: I quit while I’m ahead too often

    British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home