Interest rate fog makes for tough decisions for borrowers

Whom should homebuyers believe?  A member of the Bank of England's Monetary Policy Committee has called for a rise in interest rates for the first time in almost two years.  Andrew Sentance voted to lift Bank Base Rate to 0.75% from the record low of 0.5%, because of stubborn inflation, the MPC minutes show.  He argued that the persistence of inflation has cast doubt on the Bank's prediction that spare capacity in the slow economy would be enough to bring inflation down.

Meanwhile the Centre for Economics and Business Research has made itself a hostage to fortune by predicting categorically that interest rates will remain stable at 0.5% until the end of 2012. ‘The Chancellor noted Mervyn King’s remark at the Mansion House dinner last week that if growth was slower interest rates would be lower,’ commented Douglas McWIlliams, chief executive of the CEBR.  ‘We agree and – with our lower growth forecast we now think that base rates will be stable at 0.5% until the end of 2012 and the 10 year bond yield will fall to 3%. With base rates lower for longer, we also expect mortgage rates to fall from around 4% at present to 3% by early next year.’

So is now the time to remortgage?  And if so, should you go for a fixed or variable rate?  Or will you get a better deal in a year’s time?  At the moment demand for mortgages is low.   According to the Council of Mortgage Lenders, the market remains, ‘subdued’ and it warned that higher taxes and public spending cuts announced in the Budget will probably depress mortgage lending further – particularly if there is a rise in unemployment to three million as many have predicted.

For those who are not moving house, now could be a good time to arrange a remortgage if you have enough equity in your home – unless you believe the CEBR view that mortgage rates will move lower.   But remember there are as many economists who believe that inflation will be a problem – which would indicate higher interest rates – as those who think deflation is the real enemy.  Economists have a poor track record of getting things right. 

Anyone with at least 15% equity in their property can now probably get a better rate than they are currently paying - unless they are one of the lucky minority on a low Standard Variable Rate of 2.5%.  This includes some borrowers with Woolwich, C&G and Nationwide while borrowers with Bank of Ireland and Bristol & West are paying just 2.99%.

For existing borrowers paying an SVR of 2.5% there is no point in moving unless you want the certainty of a fixed rate.   Others who should stay put include Woolwich customers who have reverted to its lifetime tracker rate of Bank Rate plus 0.95%, currently a pay rate of 1.45%,  or those on Intelligent Finance’s SVR.

But homebuyers with major lenders like Halifax who are paying 3.5% or more should now start to shop around because there are cheaper deals available - provided you have a clean credit track record.   Borrowers with some of the small building societies are now on SVRs of 6% or more and over the past year 16 lenders have increased their SVRs – even before there has been any increase in Bank Base Rate. 

While two-year fixes remain the cheapest, this could leave you vulnerable to an enforced switch two years down the line – just as mortgage rates are moving up.  If you decide to go for a fix it is probably better to settle for five years – and there are a couple of really good deals available.

Chelsea Building Society, has a new five-year fixed rate loan at 3.99% for those with a 25% deposit. There is a fee of £495 and free valuation and legal work. Co-op/Britannia also has a five year fix at 3.99% with loans up to 75% and a fee of £999.  Loans are only available direct.  Historically a five year fix at 3.99% is a very good deal.  You can also get a 10 year fix at a relatively competitive rate of 4.99% and it is worth pointing out that less than 40% of lenders’ SVRs are now lower than 4.99%.

For those requiring loans of up to 90% switching to a five year fix is not such an attractive deal because the rates are substantially higher.  Co-op Bank/Britannia has just reduced the rate on its five year fixes for those needing a 90% loan and cut the fees.  You will now pay 5,89% for a five year fix with a fee of £499.  The Post Office is also offering five year fixes at 5.99% for those requiring up to a 90% loan.  This is probably only worth considering if you are with one of the smaller building societies on an SVR of 6% or more.   But it is a good deal for a first time buyer looking for the security of a fix when they buy their first home.

If you still prefer to take your chances with a variable rate tracker, First Direct’s lifetime tracker at 2.39% (BBR plus 1.89%) – importantly with no early repayment penalties so you can switch to a fixed rate at any time –for loans up to 65% with a fee of £499 remains top of the best buy table.  The offset version is at 2.49%.

Broker John Charcol has a lifetime tracker with Woolwich at 2.69% (BBR plus 2.19%) with an arrangement fee of £1,499 and an early repayment charge of 1% if you switch lenders before September 2012.  Loans up to 70% are available.  And there is also a really cheap discounted deal with HSBC at 1.99% for two years reverting to the existing borrowers’ rate of 3.94%.  Loans of up to 70% are on offer and the fee is £999.