Thousands of homeowners could bag cheap fixed deals to reduce mortgage payments

Published 10th Aug 2011

Thousands of homeowners could reduce their mortgage payments by switching from a standard variable rate to a fixed deal.

About 2.2 million households are sitting on a bank or building society standard variable rate (SVR) paying about 4 pc interest.

However, a flurry of ultra-competitive fixed-rate deals have launched recently, allowing homeowners with 20 pc equity to lock into a rate below 4 pc for five years.

By switching to a fixed rate, borrowers could pay less than they do currently and safeguard against their payments going up when the base rate starts to rise.

Five-year fixes are considered better value than two-year fixes because the Bank of England base rate is predicted to remain very low until late 2012.

Aaron Strutt, adviser at broker Trinity Financial, says: ‘If you want to sit back and forget about your mortgage rate for five years, you will be safe in the knowledge that you have a great deal.’

Some lucky Nationwide, Lloyds TSB and Cheltenham & Gloucester borrowers are on an SVR of 2.5 pc, unlikely to be bettered elsewhere.

However, the average SVR is 4.8 pc, according to analyst Moneyfacts.

NatWest, Lloyds and Nationwide have SVRs at 3.99 pc, while Leeds BS has 5.69 pc and Yorkshire BS has 4.99 pc. Lenders have been slashing fixed rates recently to lure people off these variable deals.

If you want to fix now, it is important to weigh up the fee, as many of the rock-bottom rates have large arrangement fees of about £1,500.

For example, Chelsea BS has a five-year fixed rate at 3.39 pc with a £1,495 fee. Monthly repayments on a £150,000 mortgage would be £742 and total cost over five years would be £44,520.

It also has a five-year fix with a higher rate of 3.99 pc, but a lower fee of £195. Monthly repayments would be £791 and total cost £47,655.

Homeowners should work out which rate and fee combination offers the cheapest deal for their mortgage size, as sometimes it can work out cheaper to take a higher rate and a lower fee.

You may be able to get a cheaper rate with a tracker mortgage, but this means your mortgage payments will increase in line with the base rate.

Experts are divided over when the base rate will increase from its current historic low of 0.5 pc.

Howard Archer, chief economist at IHS Global Insight, thinks it will rise to 1.5 pc by the end of 2012.

But Vicky Redwood at Capital Economics says the first increase will be in early 2014, with the base rate hitting 1.5 pc by the end of that year.

Source: ' ThisIsMoney '

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