Time to switch to a fixed rate

Published 25th Jan 2010

Homeowners have been warned that mortgage rates could rise sooner than expected after official data last week showed inflation leapt 2.9% in the year to December.

Borrowers with a deposit or equity in their homes of 40% or less would be better off fixing to protect themselves from higher rates, according to research for The Sunday Times by L&C Mortgages, the broker. Those with more than 40% should still go for trackers, though, because they can get access to better deals.

Thousands of borrowers already face a sharp jump in repayments after the decision by Skipton building society to raise its standard variable rate (SVR) from 3.5% to 4.95%. The move, which will add nearly £2,000 a year to the cost of a £200,000 repayment mortgage, is expected to be copied by other lenders. Principality building society said it will review its SVR, currently 4.99%, “over the coming months”.

Many borrowers have been sitting out the credit crunch on their lenders’ SVRs, but Skipton’s move — and expectations of a higher rate as a result of the inflation spike — could prompt them to remortgage.

The number fixing has already risen in response to the uncertainty, Santander said last week. Moneysupermarket.com, the price comparison site, said it expected the cost of mortgages to increase as rising inflation pushed up interest rate expectations. Hannah-Mercedes Skenfield at Moneysupermarket said: “We’ve seen a number of lenders cut their fixed rates in recent weeks but that trend is likely to reverse. Borrowers considering moving from their SVR to a fixed-rate deal should move very quickly because the current rates probably won’t be around much longer.”

Most economists expect Bank rate to remain on hold at 0.5% until October, then to double to 1% by the end of the year, rising to 2.5% in the second half of 2011, according to a Reuters poll last week.

L&C looked at whether you should opt for a fix or a tracker, depending on the size of your deposit, assuming rates followed this relatively modest path.

FIRST-TIME BUYERS

For first-time buyers and those with small deposits there is more incentive to fix as the gap between fixed and tracker rates is smaller than for those with big deposits.

Borrowers with a 15% deposit can take out a lifetime tracker with Cheltenham & Gloucester (C&G) at 4.99%, while Yorkshire building society has a five-year fix at 5.89%.

Richard Morea of L&C said: “The 1% gap could quite quickly be eroded when rates rise. If you have a deposit of only 10%, there are three times as many fixed rates as trackers on the market.”

For example, someone with a £200,000 mortgage would initially have repayments of £1,275 on the fix compared with £1,168 on the tracker. However, if interest rates rose to 2.5% as the markets expect, repayments on the tracker would rise to £1,477.

Assuming Bank rate hits 2.5% in the second half of 2011 and 4% by the end of the five-year fixed-rate term, you would be £9,914 better off with the fix.

Those who bought recently with a deposit of less than 20% might also consider fixing as the rebound in house prices last year is giving homeowners access to better mortgage rates. Ian Gray of largemortgageloans, a broker,said: “We have started to see surveyors being realistic rather than pessimistic with their property valuations. This is starting to help more people look to remortgage where previously it was not possible.”

THOSE WITH BIG DEPOSITS

Unlike first-time buyers, borrowers with more equity can access some of the cheapest lifetime tracker deals on the market, which may tip the balance in favour of sticking with a variable rate.

The best-buy tracker for those with a 40% deposit is a lifetime deal from HSBC at 2.49%, with no early repayment penalties. The best five-year fix, also from HSBC, is at 4.73% — a 2.24 percentage-point difference. For a loan of £200,000, monthly repayments on the tracker work out at £896 — rising to £1,111 if rates rise by 2 percentage points — compared with £1,138 on the fix.

Assuming Bank rate hits 2.5% in the second half of 2011 and again rises to 4% by the end of the five-year term, you would be £200 better off with the tracker.

However, those with large loans may still prefer to fix, as Bank rate rises could be costly. Hybrid deals are one option, where you can fix and track part of your deal.

SUPER-LOW TRACKERS

High street lenders no longer allow existing borrowers on variable deals to remortgage part of their loan on to a fix — although Coutts, the private banking arm of Royal Bank of Scotland, does.

Gray said: “It seems all high street lenders have closed the door on this. Abbey and Woolwich have a big problem with profit margins on these old deals, which are cheaper than the cost of money.”

For those on the C&G and Nationwide SVR at 2.5%, Bank rate would have to rise to 2.25% before they would be better off with a fix. Those on a lifetime deal that tracks Bank rate plus 1% would be better off staying put unless Bank rate rises to 3.25%.

Source: ' Sunday Times '

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