Fixed-rate loans lose their appeal
Sunday 21 May 1995
THE CHANCELLOR'S determination to try and hold base rates at current levels has been vindicated by the latest economic statistics confirming that a slowdown in the economy is already under way.
But if interest rates have peaked, it also means that many home-owners and home-buyers who committed themselves over the past six months to fixed- rate loans for up to five years, in the belief that they were protecting themselves against a likely rise in standard variable rates to 10 per cent or more, are likely to find themselves locked into rates which now look unattractive.
Mortgage lenders can still get funds in the London money market at around 7.5 per cent, and with real activity in the housing market still depressed, competition to grow market share by poaching existing borrowers from other lenders is likely to remain intense.
In the past week the TSB has introduced a new round of fixed-rate mortgage offers at lower, rather than higher, rates and other lenders are likely to follow suit. Borrowers who have been faced with a choice of fixed-rate mortgages or discounted rates must now think again.
Until recently discounted rates have borne the implicit threat that even with the discount they could rise at short notice, unlike fixed rates which mean precisely what they say. But if interest rates in this economic cycle have indeed peaked, then the balance of advantage between fixed rates and discount rates will shift significantly in favour of the latter.
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