As banks offer new fixed deals amid base rate rise fears... Should you take the mortgage gamble?

Published 05th Nov 2010

Millions of homeowners are being enticed to take a £4,000 interest gamble as banks and building societies look to cash in on fears of a base rate hike.

A mortgage war has seen the cost of fixed deals for the most desirable borrowers plunge to ­historic lows.

These cheap fixes have been launched as speculation has increased that interest rates could rise early next year as a result of stronger than expected ­economic growth.

The difference between ­taking a cheap fix and ­sitting on your lender’s standard ­variable rate (SVR) could be up to £4,000 if the base rate rises under the worst-case ­scenario, Money Mail analysis shows.

The cheapest two-year fix for someone with 25 per cent equity comes from Yorkshire Building Society. This is set at 2.89 cent and would cost £17,367 for a borrower with a £150,000 loan, according to data analyst Moneyfacts.

But if interest rates rose gradually by 2.5 percentage points over the next two years, then a borrower on Santander’s SVR could pay £21,134 — an extra £3,767.

Borrowers with Woolwich, HSBC and many smaller lenders could also make substantial savings. But with Nationwide and C&G, which have lower SVRs, the ­savings would be around £300.

nd the gamble is that interest rates could stay more or less the same. If this happened, borrowers on Nationwide or C&G’s SVR could pay as little as £16,152 over the next two years while those with Santander would pay £19,488.

Although many economists expect interest rates to remain low, an increasing number expect rises next year.

A survey of 57 economists, by ­Reuters, shows they expect the base rate to rise to 1 per cent by the end of 2011 — a 0.25 percentage point increase on their previous prediction — after new figures revealed the economy grew twice as fast as expected in the three months to September.

The Bank of England base rate has been at 0.5 per cent for 19 months.

RBS economist Fionnuala Earley thinks it will increase to 2 per cent by April 2012, and house prices will fall 1 pc this year, and by another 2 to 5 per cent in 2011.

Ruth Lea, economic adviser for Arbuthnot Banking Group, thinks base rate will be 1.5 per cent by the end of 2011 and 2.5 or 3 per cent in 2012. She thinks house prices will fall by about 5 per cent next year.

But Jonathan Loynes, at Capital Economics, predicts base rate will remain the same until 2013. He thinks house prices will fall by 10 per cent next year. Whether you should switch your mortgage depends on your ­circumstances and view of what will happen to rates.

Even if base rate does not rise in the next two years, many homeowners could benefit from locking into a cheap fix now.

Melanie Bien, of broker Private Finance, says: ‘If you are on one of the cheapest SVRs of 2.5 per cent, you may want to stay put if you don’t think interest rates will rise soon. ‘However, it may be worth remortgaging if you’re worried about job security and want peace of mind.’

Banks are sweetening the deal with perks and £250 cashback for those who swap. They know many homeowners are fearful that new mortgage rules and falling house prices could leave them unable to remortgage next year.

David Hollingworth, of broker London & Country, warns: ‘It will be much harder for many people to get a mortgage deal — the self-employed, those approaching retirement or those with poor credit histories will ­particularly need to shop around.

Anyone who has less than 20 per cent equity will find it difficult to remortgage.’
The best rates are reserved for those with good credit scores and the most equity in their property. There are still very few cheap deals for first-time ­buyers with a small deposit.

For those with 50 per cent equity, ­NatWest is offering a two-year fixed rate to remortgaging ­customers at 2.75 per cent, with no arrangement, legal or valuation fees and £250 cashback.

This gives monthly payments of £692 and a total cost of £16,608 over two years on a 25-year £150,000 mortgage.

NatWest is also offering a five-year fix at 3.75 per cent (£771 per month) and a tracker at 1.99 pc (1.49 percentage points over base, giving £635 per month), both with no fees.
Santander has also reduced rates specifically for remortgage customers with 40 pc equity — its two-year tracker is at 2.19 per cent and its two-year fix is at 2.99 per cent, both with a £995 fee.

This also comes with free legals and valuation services. The cost of the two-year fix would be £711 a month or a total of £18,059.

Yorkshire BS’s two-year fix at 2.894 per cent for those with 25 pc deposit has a £495 fee and free legals and valuation (or £250 cashback for house purchases). This would give monthly repayments of £703.
Halifax is offering all customers — whether first-time buyer, ­home-mover or remortgager — £500 towards energy costs if they take a mortgage before November 5.

Those with 254 per cent equity or deposit can get a three-year fixed rate at 3.84 per cent with a £995 fee. Monthly repayments would be £779.

Elaine and Richard Morrissey reduced their outgoings by £500 a month by remortgaging to a two-year fixed rate at 2.99 per cent.

They found the deal with Coventry Building Society via their broker, London & Country Mortgages.

The couple, who live in a cottage in Yeovil, Somerset, with their son, Harry, had a three-year fixed rate with the Bank of Ireland at 5.95 per cent and about £20,000 of credit card and loan debt. They decided to pay this off by remortgaging.

Mrs Morrissey, 47, says: ‘A tracker would have been slightly cheaper at the moment, but we don’t know what’s going to happen to interest rates and prefer the certainty of a fixed rate.’

Unfortunately, the couple had to pay a £7,000 early repayment charge to the Bank of Ireland to leave their fixed rate before it matured in June next year.

‘We were struggling to afford our debt repayments, so the only way to solve the problem was to roll up the debt and remortgage to a lower rate,’ she says.

Source: ' MoneyMail '

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