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Fix your mortgage before rates take off

The Bank of England may have held the base rate at 0.5%, but the tide is turning for mortgage borrowers.

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by Lorna Bourke on Jan 14, 2011 at 00:01

Millions of homebuyers breathed a sigh of relief when the Bank of England decided to keep Bank Base Rate at 0.5% for another month. But for some 7 million mortgage borrowers on variable rates, the tide is turning inexorably against them. Swap rates which underpin fixed rate mortgages have started to rise and home loan rates generally look as though they have bottomed out. Lenders have been withdrawing products and are likely to relaunch them at higher rates. Now could be the time to think about switching to a fixed rate if you are able to do so.

Expecting a rate hike

Although the pundits are not predicting any interest rate rise until possibly the second half of the year, the swaps market, like the stock market, builds in expected changes. So as the likelihood of a Bank Base Rate rise increases, fixed rates will become more expensive even before there is a change.

‘There has been a lot of volatility in the swaps market, particularly five year swaps,’ confirms David Hollingworth of mortgage broker London & Country. ‘More and more people will be looking to batten down the hatches and opt for the certainty of a fixed rate.’

But will they? A recent survey from www.unbiased.co.uk, which represents independent advisers, found that homebuyers are very shortsighted. The average rate homeowners would be prepared to fix at is now just 3.3%, substantially lower than the 4.0% they were prepared to accept a year ago. Almost one in six borrowers would only be happy with a fixed rate deal of 2% or less for the next three years – a totally unrealistic expectation. Almost a third of all homeowners are on their lender's standard variable rate mortgage and have no plans to change.

Even the best three year fix from Chelsea Building Society currently stands at 3.29% and maximum loan is 75% - which many people won’t be able to meet.

Get on with it

For many homebuyers, remortgaging sooner rather than later should be a priority. If they have only 20% to 25% equity in their homes, falling house prices could tip them over a threshold making it more expensive to remortgage. All the best deals require a 25% deposit and some as much as 40%.

The rises in swap rates are particularly worrying as five year swaps have increased the most. Anyone thinking of remortgaging to a fixed rate needs to take into account that the interest rate cycle generally takes at least three years and often five to move up from its low, hit a peak and fall back again. The current situation with Bank Base Rate sticking at its record low of 0.5% for 22 months since March 2009 is unprecedented. Several bank rate changes in the course of a year is the norm.

For example, BBR last bottomed out at 3.5% in July 2003. It took until July 2007 to peak at 5.75%, bottoming out at 0.5% again in March 2009 – a period of six years. This was a fairly typical timescale – although not the crash to just 0.5% following the credit crunch. So borrowers wanting to avoid a sharp rise in their mortgage costs need to go for a five year fix if they are to avoid finding themselves forced to remortgage again at a time when interest rates are much higher.

Tough criteria

‘It is still possible to get a five year fix at below 4% if you have low loan to value but as the possibility of interest rate rises increases, rates are likely to go up,’ warns Hollingworth. The best five year fix is from First Direct at 3.89% but the maximum loan to value is only 65%. Newcastle Building Society has a five year fix at 3.99% with a maximum loan of 75%.

Lenders are reacting to higher swap rates by repricing their loans. Skipton Building Society has withdrawn all its three and five-year fixed rate deals due to ‘unprecedented demand’ and fears of rising interest rates. Once interest rates actually start to move up anyone hoping to remortgage is likely to be swamped in the crush.

Andrew Montlake of mortgage broker Coreco echoes this advice, pointing out that rates are moving up. ‘The five-year fix we saw at 3.69% looks unlikely to be surpassed and, by way of example, this same lender now prices the same product at 4.09%.’ For those with a relatively small loan wanting to remortgage he points out that, ‘you can secure at 3.95% albeit at just 50% loan to value whilst the 4.09% is available up to 60% LTV.’

‘Whilst I do believe we will see competition in the mortgage market increase again in the second half of this year, I don’t think this will be enough to see a return to the very low rates we have experienced recently. In other words, for all those who have been thinking of remortgaging for a while, the next three months really do look like the ideal time to finally make that move.’

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27 comments so far. Why not have your say?

My fixed rate has come to an end and I'm on the lenders SVR of 1% over BBR.

What to do???

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sit tight

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I'm in a similar position (although slightly more complicated). I have 2.5 years of a 5 year fixed rate mortgage to go, and I'm currently paying 5.63% (yeah, I know, I know).

If I break out of it now, I have to pay 3%, but that's worthwhile if I can get a rate of 3.89% (my LTV is ~30%) - I'll save slightly more than 3% over the next 2.5 years. My big question is: what do you think (guess) interest rates will be in 2.5 years' time? Should I wait for my current deal to expire, on the expectation that I'll get a better deal then?

I appreciate this is real crystal ball stuff, but I'd love to hear any opinions!

Kenny

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No rush, it's going to be year's till they go up by mmore than a couple of percent.

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Long term average interest rates are around 5%

http://www.housepricecrash.co.uk/graphs-base-rate-uk.php

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Kenny

If I were you I would not do anything until the end of this year to see how the government cut backs effect the economy, we may well end up back in recesion, and if that happens rates will not rise for a long time.

even if they do I doubt the base rate will rise more than 1% this year.

Im on A tracker and intend to keep this going for as long as possible before the inevitable rise in inflation which I expect to happen between 5 and 10 years from now.

best of luck what ever you do.

Paul

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Its simple economics. Interest rates rise to take money out of the economy which in turn reduces demand which drives inflation. The government cuts and tax rises will all reduce our spending power and therefore inflation.

Over the next cycle, fiscal policy from the government will act as drag. If inflation contines upward and growth is maintained the govenment will impliment more cuts.

Personally Im sitting tight.

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On a BoE +0.44% tracker for the term of the mortgage, so can't see the benefit of fixing right now.

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This article and all the ones like it warning homeowners of impendng doom in the shape of rising rates are totally misleading and frankly irresponsible. I'm on a tracker and paying 2.49% with no exit penalties. Perhaps the author of the article should explain why fixing at 4% for the next 5 years would be a good thing? What on earth is the point of paying another 1.5% now, just in case the base rate should go up by the same amount at some point in the future? It is going to be quite some time before we see the base rate at 2%. When it does hit that level, i can start looking at remortgaging, but don't tell people to start shelling out more now to protect me from a future change that is yet to happen. Even if you start making savings in say the 4th or 5th year, there's no way they will outwiegh the savings you've made from having a tracker in the first 3 or 4 years. It's like going out with the umbrella up on a Tuesday when you've heard it's going to rain on Friday.

Plus a fix is only ever a temporary fix. When the 5 years is up you're back in the same boat with everyone else!

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I totaly agree sit tight

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Sell your house, rent, put the equity in emerging markets and watch your wealth increase.

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i have never read such a platent load of rubbish trying to panic people to remortgage when they dont have too,

these are the same sort of people who talked us into the mess we are in....the fixed rate also carries a arragment fee as well..

dont get drawn into this bit of rubbish trying to say the end of the world is here... , stay on the variable bank rate..

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According to the headline in today's Telegraph, rates could increase by June, so Lorna's warning could be timely. If rates do go up, and you could not afford the increase, or would prefer certainty, then fix now. That said, rates might stay low. It all depends on inflation, and how the economy behaves.

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If you're on a variable product then of course you could make the calculations on the break even point based on how fast you think rates might rise vs paying the higher initial percentage on the fixed rate. However, this is missing the point completely about the right approach. The right approach will depend entirely on individual circumstances and should be based on the view - "can I afford the mortgage payments if the rates should rise beyond x%?" If the answer is no and you can get a fixed rate below your maximum affordability, then you should probably buy piece of mind even if it means paying a premium today.

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Hi there, August this year our fixed term with First Active comes to an end. We have been paying 5.19%.Would it be worth our while to pay an early redemption fee in order to get another, better rate mortgage. Our property is worth 240.000 and our mortgage is 82.000. Any advice would be appreciated.

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Julie, no offence but 5% on a mortgage of that LTV is bonkers. You don't need to be paying anywhere near that. HSBC do a tracker at base rate plus 1.8% which would put you on 2.3% today. Rates will rise in the coming years, slowly, but it will take a number of years before you're paying anywhere like what you're paying now (i.e for base rate to hit 3.6% from 0.5%). In the meantime you could invest the savings you make until the level does get to your old rate and pay down a nice extra chunk of the mortgage when you next come to remortgage.

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Andrfew thank you very much for this advice - I had a feeling we were paying through our teeth! I will take action today and ring HSBC and see what they say. I will keep you posted - once again many thanks

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Julie, Andrew may not be giving you best advice. Check the reversion rate with First Active once your fix ends in August, many of their deals revert to Base

+ 0.90% for term. If this is the case ride the storm until August and then you will have a rate that no-one can touch for the medium term. You wont pay a redmption charge or an admin fee to leave FA either.

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I did speak with First Active (our current mortgage supplier) and they told me that they will offer us a low based tracker, which, based on the base rate today would be just 1.6% which I thought was very good - wish I had a crystal ball!!!

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What is everyones view about the base rate - do you think it rise and if so, when?

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Julie Lynes, If it does rise I think it will be slowly and in small increments.

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Julie. I agree with Jonathan, i think base will rise slowly and that your reversion rate of base +0.90% for the remaining term is going to be attractive for some time.

My guess is 0.25% rise in the summer and another 0.25% late 2011 or early 2012.

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I think I will sit tight! Thanks for all your feedback!

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stick to the variable rate..( if you add on the arrangment fee and costs involved ) it gets quite exspencive to take out another fixed term..

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This makes interesting reading today doesn't it!

I don't think this is a case of being wise after the event. As many have said on here, it was clear to many people that interest rates were and still are going nowhere fast. To panic people in to fixing at a rate way higher than they need to is just irresponsible and POOR, LAZY journalism.

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Dislexic Landlord

Aug 17, 2011 at 17:50

hi andrew

The truth of the matter nobody knows really what will happen ???? to rates

as a long term investor I still pick fixed rates on new purchases

but 50% of my mortgages are now on tracker rates of around 2%

If you look at the adverts asking folks to take fix rates it come from the banks alone

they have a vested intrest in chargeing fees ect ect and of course makeing a large margin on the intrest rates alone

Im a strong beliver all home loans should be fixed rate of no less than 5 years

The avarage home owner who has a mortgage higher then 50% LTV should be on fixed rate no question about it

in my hummble opinion

we all know rates can only go one way and thats up but my gut feeling is we are not going to see it rise for a very long time how and when is anyones guess

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