Now may be the right time to take a fix: Neasa MacErlean looks at a booming sector of the home loans market and indicates areas needing caution

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The Independent Online
ONE FINANCIAL product that has blossomed over the past two years has been the fixed-rate mortgage.

Thriving on a climate of economic uncertainty and insecurity, the fixed-rate sector has now doubled in size since the start of the recession.

Three years ago very few building societies had any experience of the sector. Now many of them make half their lending on the fixed-rate side.

Borrowers are faced with an abundance of about 80 fixed-rate products from the top lenders alone - spanning terms of between one and 25 years and rates of between 5.95 and 11.25 per cent.

No expert will make a cast-iron prediction, but some of them feel that the fixes being offered in the market now may not be bettered for some years.

Abbey National, for instance, is offering first-time buyers a one-year rate fixed at 6.75 per cent - its lowest mortgage rate in 25 years. This weekend Newcastle Building Society launches a 7.99 per cent rate fixed for five years.

Portman Building Society is relaunching its two-year 7.50 per cent fix, a product that is made more attractive by the fact that the society is not charging an arrangement fee.

Ian Darby, of the mortgage brokers John Charcol, said: 'Even the less competitive products look like reasonable value. It looks as if we are fairly close to the bottom of the cycle.'

There is some evidence to suggest that fixed rates have already gone past their best point. Abbey, one of the most competitive players, has recently put up some of its fixed rates. But in contrast Nationwide has just extended its 7.25 per cent two-year mortgage - its cheapest fixed rate ever.

Whatever happens to the rates themselves, fixed mortgages are here to stay as a substantial sector of the home loans market. Lenders as well as borrowers can sleep soundly, knowing that their financial exposure is limited.

For Newcastle Building Society the fixed-rate market now accounts for half of its current lending book. The society believes that it can make more of an impact in this area than on variable rates.

Borrowers and brokers might feel daunted by the number of different products available, but there are a handful of crucial differentiating factors - the rates themselves, the arrangement fees, the length of the fixed term, the likely competitiveness of the variable rates that the lender will offer at the end of the fixed term, the possibility that the lender will offer a new fixed rate at the end of the original fixed term, early redemption penalties, the availability of the product and the existence of other conditions - like compulsory insurance.

There are certain traps to be wary of - for example, the keenly-priced one- or two-year rate which will then give way to an uncompetitive variable rate. Many lenders also insist on their borrowers buying a package of insurance products from them. The additional cost will, for some borrowers, transform an apparently attractive deal into a financial albatross.

Other fixed rates are not available on repayment mortgages. And Newcastle, for instance, tends to restrict the availability of its products to areas where it has offices. Since there are no offices south of Peterborough, Newcastle products are largely unavailable in the South-east.

Mr Darby believes that for many borrowers the psychological benefit of a fixed-rate mortgage is more important than the narrower question of cash flow. 'A lot of people are not prepared to go through the roller-coaster ride of the last few years again,' he said.

(Photograph omitted)

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