Interest rates are predicted to start rising next month and rates on fixed mortgage rate deals are tumbling as lenders embark on a new price war. Now could be the best time in history to get a fixed mortgage rate!
The housing market has come to a virtual standstill following the end of the stamp duty holiday. January saw the tax threshold fall from £175,000 back to £125,000 - meaning most buyers will have to hand over at least 1% of their purchase price to the taxman.
As a result, December saw buyers rush to complete purchases, as shown by the massive 32% fall in total mortgage lending in January recorded by industry body the Council of Mortgage Lenders.
Throw in continued uncertainty around the future direction of house prices - with this month seeing the first price fall in nine months according to Nationwide - and it’s clear that homeowners and would-be buyers alike face some tough decisions when it comes to their mortgages.
This faltering housing market also spells bad news for lenders - and they’ve responded by slashing the rates on many fixed-rate mortgage deals. Figures from financial analysts Moneyfacts show that the average fixed-rate deal for a buyer with 25% equity or deposit is now 4.27% - its lowest level since July 2009.
Of course, not all of us have the luxury of such a high level of equity - and with interest rates still at an all-time low of 0.5%, do you really need to pay the extra premium a fixed-rate mortgage gives you for the privilege of set, regular monthly repayments? Well, it depends on your circumstances and financial confidence...
What to consider
First of all, it pays to do a little research. None of us - not even us writers here at lovemoney.com - have a financial crystal ball, but it’s still worth keeping an eye on the various interest rate predictions in the news. The Bank of England base rate has remained at 0.5% for the past 11 months - but a consensus is growing that rates will soon start to creep up slowly.
Do bear in mind, however, that base rate isn’t the be all and end all. The cost of your mortgage is also determined by other factors, including the rate banks charge one another for borrowing, price inflation and lenders’ profit margins.
The other thing to look out for is the various fees that come attached with your mortgage - particularly with regard to early repayment penalties. For example, you may opt to follow the base rate while it remains low before making the switch to a fixed-rate deal - but any savings you make could be swiped out by paying for the privilege of leaving your mortgage. It’s hard work, admittedly, but keep a sharp eye out for all terms and conditions.
Lastly, it can be hard to compare like with like when choosing between fixed-rate and tracker deals - so make a note of all fees and use our mortgage repayment calculator to work out in real terms what you’ll pay each month. For an informed estimate of what you’ll pay if your tracker mortgage rises, use our mortgage interest calculator.
What the expert says
Leading mortgage broker Ray Boulger suggests most of us should track for the moment. He says: “The economic arguments suggest taking a tracker mortgage because the UK economy in such a mess that interest rates will need to be kept low for several years to support the economy - yet one caveat is the political risk.
“If we have a change of government, trackers offer the best value because the gap between tracker rates and longer term fixed rates of about 2% is too high, but anyone who expects a hung parliament or a Labour victory should think about battening down the hatches and taking a fixed rate for at least 5 years.”
The best tracker deals
First Direct has launched a market-leading tracker mortgage at 3.99% for borrowers with deposits of at least 15%. The mortgage tracks the base rate plus 3.49% for the life of the loan and has a £499 arrangement fee. With a larger 35% deposit, you can get 1.89% above base rate - which currently works out at 2.39%.
Those with bigger deposits can save similar sums elsewhere. HSBC has a worthwhile deal for buyers with 40% to put down – the
HSBC Base +2.09 deal is priced at 2.59% for as long as interest rates remain at 0.5% - then at 2.09% above the base rate. There’s no early repayment charge, but it does come with a £999 arrangement fee.
Finally, those in the middle should look to the Woolwich. The mortgage giant offers a rate of 2.49% above base rate for the life of the mortgage on deposits of 25% or more - the deal comes with a £999 arrangement fee. Another worthwhile offer is the NatWest Base +2.99% deal - it’s priced at 3.49% until March 2012 and is available to borrowers with deposits of 20% or more. There is an early repayment charge during the first year, and a lower (£499) arrangement fee.
Fixed-rate best buys
There are some worthwhile fixed-rate deals on the market priced around 3.5% for borrowers with larger deposits or homeowners with equity. The best rates are available on two year fixes.
A worthwhile deal is available from First Direct - its two-year deal is fixed at 3.29% for the entire period and it comes with below-average fees of £499 for booking and arrangement. Another deal comes from Northern Rock - the state-owned bank’s two-year deal is fixed at 3.59% before April 1, before reverting to 4.79%. The two year cost in real terms is 4.6% and it requires a 30% deposit.
The Co-operative Financial Services, which offers mortgages through both The Co-operative and Britannia, has just launched a 3.19% two-year fix, for those with a 25% deposit. But beware the £999 fee.
For buyers with smaller deposits, Newcastle Building Society has a two-year fixed-rate deal priced at 5.95% with a low arrangement fee of £694 available with deposits of 10% or more. Existing Santander current account customers can also get a 90% three-year fix at 5.99%.
If you do want to fix for the longer term, First Direct’s three-year fix is pegged at 4.19% but comes with lower fees of £199 and £299 respectively. The best-priced five year fixes are available from the Mansfield Building Society at 4.75% and ING Direct at 4.88% - both require deposits of 25% or more.
For more help making the right mortgage decision, use our mortgage search service. To help save that deposit, you can adopt our goal Build up Your Savings.
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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
A Reuters poll of economists this month predicted a rise to 0.75% towards the end of the year, followed by a further climb to 1.25% in the first three months of 2011, reaching 1.75% by June that year. Other experts predict we may see rises sooner - respected economist Simon Ward of Henderson New Star thinks we could see a rise as soon as next month!