Personal Finance: Fixed rates still alluring

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The Independent Online
THE Olympic skaters sat mesmerised by their scores while the rest of us were captivated by the grace and style of the skating as well as the cut-throat competition.

Home owners and buyers have similarly been mesmerised by the numbers attached to fixed-rate mortgages when perhaps they should still be admiring the wider artistic and technical picture.

Friday saw a good old- fashioned panic, with home owners jostling to leap out of variable-rate loans into fixed rates before the numbers clicked up any higher.

It was all generated by the money markets predicting higher interest rates over the medium term. Short-term rates were not threatened, but funds to back five-year loans, which had been creeping higher all week, became more expensive.

It's all a matter of timing; lenders buy chunks of money, lend it out, and go back to the market for more when the chest is bare.

Abbey National and Nationwide had recently been back to the market and re- priced their loans a touch higher. But when the Leeds, which was offering a really cheap five-year deal at 6.75 per cent, had to re-price up to 7.39 per cent, shock waves set in. Home owners rushed to soak up the remaining five-year deals as they were withdrawn from sale.

But by the end of the day the markets had calmed down and rates were already beginning to slide back a little.

Some lenders rushed out new deals, but most - sensibly - decided to wait until this week before testing the temperature of the fixed-rate waters. Of course, when it comes to fixed rates, the cheaper the better - as long as there are no hidden catches such as compulsory insurances, high fees or impossible redemption penalties. But it is not a case of now or never - even if this does turn out to be the bottom of the market.

The five-year deals still around at 7.25 per cent, from Lloyds and Midland banks for instance, still undercut basic variable rates - 7.74 per cent with most lenders - and look like terrific value.

Fixed rates are not just about beating the variable rates on offer. They are also an insurance policy against rising rates. So you might think it was worth paying a little more than the going rate to get hold of one that is going to last a decent length of time and carry you through the period when rising rates are forecast.

A five-year term seems about right. Beware being seduced by the tiny rates around for one or two years. You could end the fix just to emerge into high rates. Three years will probably bring you out into the aftermath of a General Election - and that could also be uncomfortable.

While there may yet be some tempting offers at 10 years and beyond, those unable to see that far into their personal future should still be pretty pleased with one of the new five-year deals around - even if they are a step away from the bargain basement.

SAVERS who feel that their cash is wasting away in a bank or building society should not forget the bargain offered by giving the money to the gas or electricity company.

There is still time to dodge the 8 per cent VAT on fuel that starts on 1 April. So unless you have found the impossible account that pays more than 8 per cent, you might as well hand it over as pre-payment on your fuel bills. Many companies are helpfully sending out special pre-payment forms - after all they gain from the cash flow. It is only the Exchequer that loses out.

Even if you do not want to pre-pay, you should ensure that you are not paying an estimated bill that that gives too low a reading. Read your own meter and ask for a higher adjusted bill, so you are least up to date before the VAT man cometh. And remember, in a year's time the game will roll around again as the VAT rate on fuel goes up to 17.5 per cent.