DESPITE the fact that the Bank of England’s monetary policy committee voted to keep interest rates on hold at 4.5% for the ninth consecutive month last week, the City’s money-market traders are betting on a rate rise before too long.
This means fixed-rate mortgages are becoming more expensive, as lenders fix these deals by buying the cash through the money market. So borrowers who want the security of a fixed-rate deal will have to move fast to take advantage of the few remaining low rates.
Abbey, Bank of Scotland and GMAC banks, and Yorkshire, Cheshire and Stroud & Swindon building societies all pulled their fixed rates last week. Some, including Abbey, have already announced higher rates. Others such as Yorkshire are waiting to see what happens to money markets over the coming weeks. Nationwide’s current range of fixed-rate products is being withdrawn on Monday night, and Halifax is pulling its range at the end of Tuesday.
These announcements follow similar moves from Co-operative bank, Scottish Widows, and the Nottingham, Leeds, Norwich & Peterborough and Principality building societies.
Two-year swap rates went above 5% on Thursday — their highest for 13 months. They have been rising steadily throughout the year — two-year money was priced at around 4.5% in January — as the chances of an interest-rate cut has subsided. Stronger than expected economic figures were behind last week’s increases.
At the beginning of the year, many economists thought the next interest-rate movement would be down. But following evidence of a resurgent property market, signs of recovery in manufacturing and inflationary pressures caused by the high oil price, some now think we could see a rate rise before the end of the year.
The long-term outlook for interest rates remains stable, but in the near future fixed-rate mortgages will almost certainly get more expensive.
Melanie Bien at Savills Private Finance, a broker, said: “It is only a matter of time before lenders raise their fixed rates even further. If you need the certainty of set monthly mortgage payments, it is strongly advisable to act sooner rather than later.”
Britannia building society and Cheltenham & Gloucester, Lloyds TSB’s mortgage arm, have the best two-year fixes at the moment. Britannia’s is 4.34%, with a £499 arrangement fee. C&G’s deal is dearer — 4.45% and £599 — but it is better value for those remortgaging because you receive a free valuation and legal work.
Neither of these deals will be around for much longer, though, so if you want to take advantage you need to get your application in quickly.
Simon Tyler at Chase de Vere Mortgage Management, a broker, said: “We are likely to see two-year fixed-rate deals, which were as low as 4.3% just a few weeks ago, rise to nearer 4.6% or 4.7% in coming weeks.”
Someone with a £150,000 mortgage, repayable over 25 years, would pay £820.18 a month with the Britannia deal at 4.34%. The payments would be £850.87 a month if the rate was 4.7%, costing an extra £737 over the two years.
Longer-term fixed-rate mortgages are also expected to rise. Nationwide has the cheapest five-year deal at the moment, at 4.78%, but it is being replaced on Tuesday. So anyone wanting to get in on this deal needs to act today or tomorrow. C&G, Royal Bank of Scotland and Marsden building society have five-year fixes at 4.79% but these will probably go soon too. It is thought that five-year rates will rise to about 5%.
But some brokers think that locking in at this level could be a mistake. Ray Boulger at John Charcol said: “You have to be more cautious if you are thinking of fixing for the longer term. The cost of five-year mortgages will rise in the near future and the risk is that you will lock in at the peak and find yourself stuck with an expensive deal. You could have fixed for five years at 4.5% about six weeks ago.”
The dilemma facing borrowers is that, while fixed-rate deals look set to continue going up in the immediate future, nobody knows how long this upward movement will last.
Swap rates are very sensitive to economic news, so if the oil price drops or the next set of manufacturing or retail figures are weak again, they could fall back as quickly as they have risen. If that happens the cost of fixing your mortgage would drop too. So it may not be a good idea to lock in now.
The economic outlook is fairly benign, as economists expect rates to remain stable. There may be some rises and falls now and again, but rates are not expected to fluctuate wildly and economists do not think a return to the days of double-digit interest rates is on the cards.
Borrowers who share this view may be happy to take a bit of a gamble and go for a variable-rate mortgage instead.
Fixed-rate deals have been far more popular than discounted and tracker mortgages in recent months. Figures from the Council of Mortgage Lenders show that 70% of mortgages taken out in February were at fixed rates.
The main reason for this is that there has been little difference in the cost of fixed and variable rates. Most borrowers have therefore been opting to fix, because of the extra security.
Jonathan Cornell at Hamptons International, a broker, said that most borrowers base their decision on price. They go for short-term deals due to the lower rates. And while fixed rates have been most popular, this is likely to change as the margin between fixed and variable rates widens because, in comparison, discounts and trackers will look much cheaper.
The cheapest two-year discount is from Bristol & West at 4.19%. If the cost of fixing for two years rises to 4.7%, there would have to be two quarter-point interest-rate rises before someone on the Bristol & West deal was paying the same rate.
If you want a longer-term deal and you prefer to fix, but you think that you may be able to lock into a lower rate later in the year, a penalty-free deal could be the answer.
Woolwich has a market- leading tracker that is just 0.19 points above base rate for the term of the loan. There is no arrangement fee and no early- repayment charges. Your payments will be lower than with any of the five-year fixes currently available, but you can remortgage and lock in to a fixed rate at any time.
James Cotton at L&C Mortgages, a broker, said: “Variable rates will look more attractive as fixes continue to rise. If you could cope with your mortgage payments increasing, should interest rates go up, a discount or tracker is worth considering.
“However, some people will always want to fix and if you are the type of person that would worry about higher mortgage payments, the premium for security is always worth paying.”
JUST IN TIME
FINANCIAL consultant Alex Baines and his wife, Francesca, are in the process of remortgaging. The couple, aged 30 and 28, from Bath, have a penalty-free discount with Cheltenham & Gloucester, which has a rate of 4.7%, but they are locking into a two-year fix from Nationwide with a lower rate of 4.39%. The Baineses managed to secure this deal just before it was pulled a couple of weeks ago.
Francesca, a human-resources adviser, said: ‘When we bought our house two years ago, fixed rates weren’t that competitive so we went for a penalty-free deal. We had been keeping our eye on rates, and when we saw that fixes were creeping up we thought it was a good time to move over.
‘I’m really glad we got in when we did, as the cost of fixing seems to be shooting up. We’ve now got the stability of a low rate and our mortgage payments will be about £60 a month cheaper.’
