Fixed-rate mortgage? Homeowners should consider all alternatives

Published 09th Mar 2010

You may pay over the odds if you panic-buy a fixed-rate mortgage when rates start rising, warn brokers



Fixed-rate mortgages may not be the best deals in the long run as interest rates stay low



Borrowers who stampede for fixed-rate deals as soon as the base rate starts rising could end up paying over the odds for their loans, mortgage brokers warn.

Although the Bank of England last week kept its base rate at 0.5% for the 13th month in a row, economists and mortgage market watchers are unanimous in predicting a gradual climb in rates over the next couple of years. Economists at Barclays, for example, expect rates to hit 6.5% by 2015.

Fixed-rate mortgages have been considerably more expensive than tracker loans in the past year, but the gap has closed slightly in the last few weeks, and HSBC in particular has seemed keen to promote its fixed-rate deals.

Martijn van der Heijden, head of mortgages at HSBC, says: "The next few years are going to be difficult to predict in terms of mortgage rates, and some volatility for borrowers may be unavoidable. The message is that if you couldn't afford an increase of up to 3% on your mortgage, you should look to fix your payments."

But mortgage brokers are advising borrowers to consider trackers unless they are very nervous about being able to afford potential rises in their mortgage rate. Ray Boulger, of John Charcol, says the withdrawal of fiscal stimuli, cut in public spending and a possible hung parliament could cause volatility in interest rates, but adds: "I see no point in fixing for two years, because rates will still be going up. If you are going to fix, it needs to be for at least five years, but then the differential between the best fixed rate and best tracker is about 2.5%. You will be paying a big premium for the protection afforded by a fix."

First Direct's lifetime tracker is 1.89% above base rate (making 2.39% now), up to 65% LTV with a £499 fee. For those still tempted by short-term fixed rates, Yorkshire building society has loans fixed at 3.09% for two years (with a £1,195 fee up to a loan-to-value of 60%), while Britannia offers loans fixed at 3.19%, again for two years, with a £999 fee for up to 75% LTV.

HSBC is offering the best five-year fixed rate, at 4.64% for up to 60% LTV with a £999 fee, while Britannia has a 10-year fixed rate of 5.29%, with a fee of £999 and 75% LTV.

But David Hollingworth, of mortgage broker London & Country, points out that borrowers who must redeem before the end of the deal will face a whopping early redemption fee of 6% of the outstanding balance in the first six years, reducing by 1% each year thereafter. He added borrowers who opt for the cheaper tracker loans should take advantage of the lower payments to over-pay their mortgages or save in a separate account to reduce the shock of future rate rises.

Source: ' Guardian '

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