How do you fancy a 30-year fix?

Mortgage rates are diving. They may follow the European market and go lower, or the American model and go longer, writes Isabel Berwick

Just how low can mortgage rates go? It's a vital question for thousands of homeowners who are coming to the end of a fixed-rate deal or are thinking about swapping to a cheaper loan. There are very good fixed-rate and discounted loans around, but it's also tempting to stick with variable rates because interest rates look set to drop further during 1999.

But if you took out a fixed-rate now, you would be stuck if mortgage rates went down to 3.5 per cent. Thousands of people have had their fingers burned by taking out five-year fixed-rate mortgages at 8 per cent or more in 1995 and 1996. Even a year ago, five-year fixed rates were selling for about 7.5 per cent. Now variable rates are as low as 5.99 per cent (Egg).

Some mortgage experts are convinced rates won't drop far below current levels and believe a new five-year fix is a good move. Simon Tyler, at Chase de Vere Mortgage Brokers in London says: "Five year rates have gone up since last month, but the average rate is 5.25 to 5.4 per cent. Even if we go into Europe, they won't be much cheaper than that.

"There are plenty of good deals around and most people we talk to want to fix their mortgage, although discounts are becoming more attractive."

The rates offered for fixed-rate mortgages reflects the current sentiment in the markets. Your lender puts together a swap deal to fix the rate for the mortgages and then hedges its own risk with other derivative deals. It's complicated and the markets change from day to day.

Adam Chester is chief economist for the Halifax Treasury department. He explains why five-year fixed rates have gone up slightly since January, despite the 0.5 per cent drop in the Bank of England interest rate: "How the market perceives inflation over the average life of the bond is key. We have a 5.3 per cent five-year swap deal at the moment. That can be broken down into a 2.5 per cent yield, a 2.5 per cent inflation expectation and a 0.3 per cent risk premium."

As recently as October 1998, the same type of swap deals carried interest rates 1.5 per cent higher than they are now. Rates will go up again if the markets start to worry that low interest rates will fuel a mini-boom and higher inflation.

Interest rates across euroland are set at 3 per cent. Fixed and variable mortgages in Europe are selling for 5 per cent.

But that could drop as lending is getting more competitive. Abbey National took the Italian market by storm last year by offering a variable rate deal at 5 per cent when most banks were selling fixed-rates at 7 per cent. The bank's variable rate in Italy is currently 4.98 per cent and it is offering a 10-year fix at 6.48 per cent.

Traditional high street lenders with high profit margins may struggle to offer us rates much below 5 per cent. But if you are undecided about whether to opt for a new fix or a variable rate, then you should also look at the new variable rate lenders such as Egg and Standard Life. They don't have expensive branch networks and they have massive cash reserves. Both companies are effectively buying customers through very attractive rates (see panel, right). If rates rise dramatically, you can always switch to a fix later on.

However, it may be that we are thinking about mortgages in completely the wrong way. Many American borrowers opt for 15- or 30-year fixed-rates for the whole life of the loan. Current deals are around the 7 per cent mark. US borrowers can also claim generous tax breaks which make the real interest rate closer to 4.5 per cent (our tiny MIRAS tax break could be scrapped altogether in the Budget next month). American borrowers can pay to swap to another long-term loan if rates plummet.

But the philosophical difference is that Americans look at buying a house as a long-term financing project, without getting obsessed with the ever- changing economic climate. Many US 30-year deals are securitised loans, meaning the lender bundles loans together and sells them to a third party as an income producing bond, with the income coming from mortgage payments.

We may start to see something like this starting here, as the Woolwich has announced a link with the US securitised lender Countrywide Credit Industries. This sort of lending should lead to a drop in rates and it should allow UK borrowers to fix their mortgage rates at a competitive level for the whole life of the loan.

HOW MUCH IS THAT MORTGAGE?

CHEAPEST VARIABLE RATES

n 5.99 per cent: Egg 0845 600 0290. Lends up to 90 per cent of the value of your home; gives you pounds 200 towards legal fees and offers free valuation.

n 6.05 per cent (4.55 per cent for the first six months): Standard Life 0845 845 8451. Lends up to 90 per cent of the value of your home; again, offers pounds 200 towards legal fees and free valuation.

SPECIAL DEALS

n Fix - 5.15 per cent for five years: Coventry BS 0345 665522. Six months' interest penalty for redemption before the end of the term.

n Discount - 1.65 per cent off standard rates for two years (currently 5.2 per cent). Rate capped at 5.99 per cent. Chase de Vere Mortgage Management 0171 930 7242.

News
The cartoon produced by Bruce MacKinnon for the Halifax Chronicle-Herald on Thursday, showing the bronze soldiers of the war memorial in Ottawa welcoming Corporal Cirillo into their midst
news
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
Property
One bedroom terraced house for sale, Richmond Avenue, Islington, London N1. On with Winkworths for £275,000.
property
PROMOTED VIDEO
News
The Edge and his wife, Morleigh Steinberg, at the Academy Awards in 2014
peopleGuitarist faces protests over plan to build mansions in Malibu
News
i100
News
peopleFox presenter gives her less than favourable view of women in politics
News
Mario Balotelli has been accused of 'threateningly' telling a woman to stop photographing his Ferrari
peoplePolice investigate claim Balotelli acted 'threateningly' towards a woman photographing his Ferrari
Arts and Entertainment
Paul Anderson plays Arthur Shelby in Peaky Blinders series two
tvReview: Arthur Shelby Jr seems to be losing his mind as his younger brother lets him run riot in London
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
A shared vision: Cerys Matthews has been familiarising herself with Dylan Thomas’s material, for a revealing radio programme
arts + entsA singer, her uncle and a special relationship with Dylan Thomas
News
In other news ... Jon Snow performed at last year's Newsroom's Got Talent charity event
people
News
i100
Life and Style
Text messaging changes as a relationship evolves
life
News
The comedian, 42, made the controversial comment following the athlete’s sentencing to five years for the culpable homicide of Reeva Steenkamp on Tuesday
peopleComedian's quip about Reeva Steenkamp was less than well received at music magazine awards
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.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?