Homeowners told to fix now

Published 26th Apr 2010

Brokers are urging homeowners on standard variable rate (SVR) mortgages to move on to fixed-rate loans as they are at their cheapest for 10 months.

Borrowers paying the average SVR could save £16,257 on a £200,000 mortgage over five years by remortgaging on to the market-leading five-year fixed-rate deal, according to figures from L&C, the broker. Even those with a deposit of only 25% are able to benefit from remortgaging as they would be eligible for the deal.

Those on the cheapest SVRs — 2.5% from Cheltenham & Gloucester and Nationwide building society — would also be better off switching to a fix, saving £550.

The research comes as markets fear that interest rates could go up more sharply than predicted because of a surprise jump in inflation.

The Office for National Statistics said inflation rose to 3.4% last month from 3% in February, due to higher fuel costs and air fares. The figures exceeded analysts’ forecasts for an increase of about 3.1% in the consumer prices index.

Minutes from the Bank of England’s rate-setting committee revealed that some members were concerned about a change in the balance of risks to inflation, which could spark an early increase in Bank rate.

Demand for fixes has been rising, with Accord’s 4.44% deal withdrawn after only a week after homeowners swamped the lender, part of Yorkshire building society. The next-best deal, from Britannia building society, is at 4.49%.

Ray Boulger of John Charcol, the broker, said: “There is a stronger argument now than there has been for about nine months for buying a five-year fixed rate on the basis that the best of them have come down almost to the levels available a year ago. There is also increased uncertainty with inflation persisting at a higher level than ... expected. However, there are still many risks to the economy and the balance of risks still suggests that Bank rate will remain very low for quite some time.”

Indeed, the Bank of England and most economists expect the inflation increase to be short-lived. A poll published by Reuters this month predicts the first rise in Bank rate to be 0.25 points from 0.5% to 0.75% between July and September, with a second increase of 0.25 points to 1% by the end of the year. Bank rate will still be at 2% by the end of 2011, according to the poll.

Barclays Capital, however, expects Bank rate to hit 3.5% by the end of 2011, soaring to about 6% by the end of 2015.

The most doveish forecast, from Capital Economics, the consultant, predicts rates to remain on hold until the end of 2011.

In response to the uncertainty, lenders are launching deals offering borrowers a chance to hedge their bets, although brokers said they may not be the best option.

Lock into a fix if you are on the SVR

Britannia and the Co-op offers the best five-year fixed rate at 4.49% with a fee of £995 available even to those with a 25% deposit. It is not available through brokers.

L&C looked at the total cost of remaining on the SVR compared with switching to Britannia’s fix, should rates rise according to the Bank of England’s forecasts published in the February inflation report.

These assume rates rise to 0.75% in August, 1% in November and 1.25% in February. Rates then rise steadily to hit 2.5% by the end of 2011 and 3.5% by the end of 2012 — a slightly sharper rise than that forecast by economists. L&C then assumes rates will remain on hold until 2015.

The figures also assume borrowers stick with the SVR for the entire five years because they miss the “window” to fix — fixed-rate mortgages are likely to rise sharply as soon as markets start to price in rate rises.

Those on the average SVR of 4.67% would pay £82,889 if they stayed put for five years, compared with £66,632 on Britannia’s fix — saving them £16,257 over five years, according to L&C.

Alternatively, they could go for a lifetime tracker from First Direct at 2.39%, which would cost them £66,429 — an additional saving of £203 compared with the fix. However, brokers said that with so little difference, it was worth paying more for the security of the fix.

David Hollingworth of L&C, said: “There is very little difference in the cost of the fix and tracker, according to the calculations. We are seeing growing numbers of borrowers in this position opt for the security of the fix, which they are getting for a relatively small premium.”

Those on the lowest SVR — 2.5% from Cheltenham & Gloucester and Nationwide building society — would pay £67,181 over five years if they stayed on the SVR, meaning they would be £550 better off with the fix. Those on Halifax’s SVR of 3.5% would pay £74,218 if they stayed put, so they would save £7,586 on the fix.

Brokers recommend borrowers go for longer-term mortgages such as five- and ten-year deals so they do not come off another deal when Bank rate and mortgage rates may be rising quickly.

Hold fire if you’re on a super-low tracker

Those paying 1.5% or less for their mortgage should stay put, L&C’s figures show, as the cost of sticking with such a deal over the next five years would work out at £60,512 — leaving borrowers £6,120 better off than with Britannia’s fix.

Beware hedging

Last week, HSBC launched a “split loan mortgage” for deals up to £500,000. This allows customers to fix a proportion of their mortgage for two years, while the rest of the loan remains variable.

There are no early repayment penalties on the tracker part, so you can pay down that part of the loan.

You can choose how much you want to fix — 25%, 50% or 75% of their loan. If you have a 30% deposit, fixing 25% of the loan and leaving the rest on a variable rate would result in total monthly repayments of £904.

This compares with repayments of £989 if you put the entire loan on a two-year fix at 3.39% from Woolwich or £1,111 on the five-year fix from Britannia.

Fixing 50% would give repayments of £924 a month, while fixing 75% would cost £956 a month.

However, Ian Gray of Largemortgageloans, the broker, pointed out that “a two-year horizon is not very long for a fixed rate in this environment”.

He said: “Borrowers might find themselves coming off the two-year fixed rate just when rates are rising fast. They will have wished they took a more traditional long-term fixed rate.”

Lenders are also launching capped tracker deals to meet borrowers’ uncertainty. However, the deals with low initial repayments do not cover you for more than two years.

Godiva is offering a tracker at 2.99%, capped at 3.99% until June 2012, with a £999 fee available to those with a 35% deposit.

The cap will kick in if Bank rate rises above 1.5% over the period — a likelihood, according to the forecasts.

However, again, the deal only has a two-year horizon and borrowers will have no insurance against rate rises once the cap expires.

Source: ' Times '

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