The tide has turned for fixes

Published 31st Jul 2007

Five base rate rises in the past twelve months have led homeowners to depend on the stability of fixed rate mortgages, but according to GMAC-RFC the tide is now beginning to turn

Since the beginning of the year, more than three quarters of all borrowers have plumped for fixed rate deals. In efforts to meet this growing demand but also to sustain advantageous margins, banks have hiked their short-term fixed rate products with each rate rise, instantly pulling any older deals. This has led to the gap between fixed and discounted or tracker products significantly widening, meaning borrowers could actually be better off in the longer term by taking a short-term risk.

Variable options do not have to be bad news. Interest rates are tipped to peak at 6 per cent and then hold until inflation has well and truly dipped back under the MPC’s 2 per cent target.

GMAC believes that consumer appetite for alternative products is inevitable as lenders have hiked their fixed rates higher with this latest rise to account for what seems to be an almost certain further increase of the base rate.

“In a rate rising environment it often makes sense for borrowers to take out a fixed rate deal, especially if a future hike would mean their monthly mortgage repayments will increase. This has certainly been the mantra of many a mortgage expert over the last few years,” said Julie Gaskin, corporate relations manager for GMAC-RFC

“However, the tide is now turning, and the fixed rates currently on offer are higher than we have seen for several years as lenders are factoring in one or more future rate rises. This makes tracker and discounted deals look increasingly attractive, and in many cases cheaper.”

Drew Wotherspoon of John Charcol firmly supports this, saying: “The gap between fixed and variable rates has definitely shrunk over the last week, with all of the variable rates that were at least half a per cent below bank rate being withdrawn. With these going, it really is a case of size matters, with some deals offering lower rates with big fees, and others more modest fees but slightly higher rates. As ever, if you need the security that a fixed rate provides, you should take one.

“One excellent product that now looks to be even better value than when it was launched is the wait and see mortgage from the Woolwich. It offers borrowers the chance to fix at 5.39 per cent for one year and has a modest fee of £595 as well as free legals and valuation on remortgages.

It’s easy to opt to fix when we’re in the midst of a seemingly never-ending incline in interest rates, however three or five years into the future is likely to paint a different picture and no one wants to be locked into a 6 per cent fixed rate deal when the Bank of England base rate starts to tumble back down again.

Wotherspoon concludes: “It is John Charcol’s opinion that there is better value to be had in variable rates right now. We do not anticipate bank rate rising beyond 6 per cent and believe that rates are likely to fall back in the second half of next year, so variables look to offer better value over a two-year period. Depending on the size of your mortgage, the best two-year variable mortgages are from the Saffron and the Halifax. As ever, advice is clearly key.”
By Ariane Buteux

Source: ' What Mortgage '

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