Interest-rate jitters may lead you astray

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The Independent Online
With Labour odds-on favourites to win the next general election, many homeowners are wondering if this is the time to fix their mortgage rate to guard against interest-rate rises.

Phillip Cartwright of Bath-based mortgage brokers London & Country says: "A lot of people take the view that [because] there's going to be a Labour government, rates are going to go up. They forget that, in the early Nineties, it was a Conservative government that put rates up to 15 per cent."

In fact, a general election usually brings a rise in rates no matter which party wins power.

This happens for three reasons. First, governments are reluctant to raise rates in the run-up to an election, as they know this will be unpopular. The Government will also tend to let public spending run a little more freely as the election approaches, creating a need to dampen down the economy once it is over. Lastly, incoming governments like to make unpopular moves - such as raising interest rates - as early as possible.

Most commentators agree that interest rates are at, or very close to, the bottom of their cycle. Ian Knight of independent financial adviser Berry Birch & Noble says: "The one thing I don't think is going to happen is that base rates are going to fall much further. They may fall by another quarter to a half percentage point before the election, but that would certainly be reversed immediately thereafter - irrespective of who wins."

Equally, few expect dramatic rises in rates. But some borrowers will still appreciate the peace of mind which a fixed-rate mortgage can offer. The problem is finding the right deal.

Your existing lender should be the first stop, but don't be surprised if the most attractive deals are reserved for new customers. Remortgaging to a new lender can cost you up to pounds 1,000 in legal and other fees, and you may have to pay an early redemption penalty to close your existing loan.

Ian Darby of John Charcol, a London-based firm of mortgage brokers says: "By the time you add up the all the costs of remortgaging to a new lender, it's unlikely that it's going to be worth your while. The first call you should make is to your existing lender to see if they'll do anything spectacular to keep you. Staying with the same lender wipes out redemption penalties and a good chunk of the costs of remortgaging."

The best fixed rates available at the moment are around 4.75 per cent for two years, about 6.5 per cent for three and about 7.75 per cent for a five-year fix. After the fixed-rate period, the loan reverts to the lender's standard variable rate (see table of Best Borrowing Rates on page 18).

When studying the deals available, make sure you read the small print. Most two- and three-year fixes will impose a hefty penalty on you if you go to another lender for as long as five years after your fix has expired. This could leave you vulnerable just at the wrong time. Rates may not go up a lot in the next couple of years, but there is more uncertainty after that.

An alternative to a fixed-rate deal is to go for one of the discounted variable-rate mortgages on the market. While the interest rate you pay will still move up and down in line with the base rate, at the outset it will be lower than the lender's standard variable rate. These mortgages can be very cheap while the discount period lasts, but it may come as a nasty shock when your interest rate reverts to the lender's far higher standard rate.