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Mortgages: don't write off a fixed rate

Most people are opting for a tracker mortgage, but it is not the right option for everyone. Lorna Bourke considers the options for borrowers.

Mortgages: don't write off a fixed rate

Most people are opting for a tracker mortgage, but it is not the right option for everyone. Lorna Bourke considers the options for borrowers.

The mortgage market may never return to its pre-credit crunch ebulliance but it is moving towards some sort of sanity.  During the boom years as much as 75% of all business was remortgaging – a pointless exercise where mortgage lenders allowed good customers to leave at the back door while incurring the high costs of offering mortgages as loss-leaders to new borrowers coming in at the front.

Few remortgage

Virtually nobody is now writing new business at a loss – which has to be a good thing.  But the latest figures from mortgage broker Charcol show that mortgages for house purchase – the role mortgage lending was originally designed to fulfil – is at its highest level for many years as a proportion of lending.  In July Charcol reports that more than 60% of all new loans were for house purchase and the indications are that the proportion will be higher still in August.

‘For the first time in what we believe is decades, the proportion of mortgages for purchases broke the 60% barrier in July,’ commented Drew Wotherspoon, director of marketing at Charcol.  ‘At the same time we see remortgaging still remaining in the doldrums.  Just two years ago it accounted for 75% of the market, whereas it is now just 40%.’ 

Warning of 8% interest rate

Borrowers seem to be ignoring the scaremongering of Andrew Lilico, chief economist at the Policy Exchange think tank, who is predicting interest rates at 8% within two years.  ‘Even with the improvement in pricing of fixed rates recently, borrowers are showing little signs that they believe it is time to take long term security,’ says Wotherspoon and confirms that variable rates and trackers, ‘are still, in our opinion, the product of choice.  For the record, we would be surprised if bank rate was anywhere near that level by the end of 2015.’  Nearly 75% of all Charcol’s clients opt for a tracker and the figure was over 80% back in May.

Not many people believe Lilico’s prediction – but stranger things have happened!  The average interest rate paid by homeowners with the base rate at its current low level of 0.5% is about 4%.  If the average mortgage rate moved to just 6% this would hurt many borrowers.  At the moment a £200,000 mortgage at 4% is costing £1,068 a month on a new 25 year repayment loan.  (Interest only mortgages are fast dying out).  If the mortgage rate moved up to 6% monthly repayments would leap to £1,304.

Consider a fix

For anyone who would find themselves in serious financial difficulty if rates rose sharply, it isn’t worth taking the chance.  It makes sense to at least consider a fixed-rate deal and find out whether you would qualify for one.

Best products on offer

If you do decide to move there isn’t much point going for a short term fix as you will probably find yourself coming to the end of the deal just as interest rates really start moving up.  A five year term looks more sensible and the best offer at the moment comes from HSBC which has a five-year fix at 3.95% with a fee of a relatively modest £599.  Loans up to 60% are available with free basic legal work for those looking to remortgage. 

But perhaps a better strategy if you can meet the 40% deposit requirements is to opt for HSBC’s lifetime tracker at just 2.19% (BBR plus 1.69% for the full term of the loan) and switch to the five -year fix if the interest rate situation starts to deteriorate.  There are no early repayment penalties on this loan so you can move freely.  The gamble is whether or not HSBC will still have the five year tracker available at such competitive rates.  For those who need a larger loan to value, Yorkshire Building Society has a five-year fix at 3.99% with a fee of £995.  Mortgages up to 75% of the property’s value are on offer.

The cheapest fixes are the short term loans and the best two-year fix on the market at the moment is from ING Direct at 2.79%, with a £945 fee. But you must have a deposit of at least 40% to qualify for the deal.  Leeds Building Society is offering a three-year fix for those with a 25% deposit at 3.65% and a fee of £999.  For those with only a 20% deposit, loans of up to 80% are available from Market Harborough Building society on a three-year fix at 3.69% and a fee of £895.

N&P (Norwich and Peterborough Building Society) is introducing a new ‘best buy' three-year fixed rate mortgage at 75% LTV, and reducing rates on its existing 85% LTV 3 year fixed rate products - with immediate effect.  ‘These changes mean that we'll be offering the lowest 85% LTV three-year fixed rate mortgage available at 3.94%, and a ‘best buy' 75% LTV three-year fixed at 3.64%,’ commented Richard Barker, product manager at N&P.

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