Is now the time to fix your mortgage?
Monday, 21 November 2011 05:16
By Kate Saines
The ‘to fix or not to fix’ mortgage debate entered new territory this month as the Libor rate soared to a two-year high.
It has well and truly thrown a spanner in the works in some quarters because it means fixed-rate mortgages have become more attractive at a time when a low 0.5 per cent base rate should be making trackers the more appealing option.
So what is happening? And, more importantly, should we all start borrowing at fixed rates?
The argument for ‘fixing’
As always, it’s the wider economy which is causing the shift in the mortgage barometer.
We all know the Bank of England base rate is at 0.5 per cent, and has been for the last 32 months. But recently the three-month London Inter-Bank Offered Rate (Libor) – the rate at which banks lend to each other - reached one per cent.
The rate has not edged this high since summer 2009, and it means the gap between the Bank of England’s Base Rate and Libor is vast.
When Libor inches upwards, as it has done recently, the message this sends out is that banks are not particularly confident about lending to one and other. And this has a massive impact on the mortgage market.
According to London & Country Mortgages, in the past a rise in Libor meant the base rate was likely to go up. But in times of financial trepidation, such as is the case now, this rise in Libor actually means banks are fearful.
So not only are they reluctant to lend to each other, but they are not that keen to lend to us borrowers either. The result is that lenders are putting up the prices of mortgages – and trackers seem to be the main target.
It’s not just Libor which is causing a reluctance to lend in the mortgage market. The financial woes being suffered in the Eurozone are also having an effect, particularly for anyone buying a home with a small deposit.
Ray Boulger of independent mortgage adviser John Charcol said the problems in the Eurozone presented a major worry to the UK’s economy but there was also the threat UK banks would be forced to cut lending as a result of write-offs from their Eurozone exposure.
He added: “If this results in a reduction in their mortgage appetite it is likely the first sector to be hit will be the higher loan to value mortgages, where there has been a significant improvement in availability and pricing over the last few months.”
He thinks the key is to look long term when it comes to mortgages, and suggests either a lifetime tracker or a long-term fixed-rate deal lasting for, say, five years.
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The argument for not fixing
As mentioned, the lenders have started reacting to the mortgage market jitters. Earlier this month Chelsea Building Society increased the interest on some of its most attractive tracker mortgages by 0.2 per cent.
And just last week there were changes from ING, Skipton Building Society, Woolwich, Nationwide and Santander, according to London & Country Mortgages.
David Hollingworth of London & Country explained that while the changes were not exclusively upward, the general trend had been for rates to increase.
However, he did not believe trackers were the only mortgages being inflicted with rate hikes.
“That movement,” he explained, “has applied not only to tracker deals but also to fixed rates, especially those at the sharper end of the best buy tables.”
So what if you are looking for a mortgage, or thinking of switching? Mr Hollingworth said an increase in rates would signal there’s little to be gained by holding off a switch.
But when it comes to choosing between a fixed-rate or a tracker he does not think fixing is necessarily the answer.
He said: “Whilst the rates on offer are rising, the issues in the Eurozone would only serve to suggest that Base Rate will not be increasing for some time to come.
“That may lead some to explore the initially low tracker rates on offer but those borrowers who are uncomfortable with uncertainty will still like the idea of locking into an attractive fixed rate before they lift.”
Best Fixed-Rate and Tracker Deals at the moment
Santander is currently offering a two-year tracker mortgage at 1.45 per cent plus base rate, which means customers with a loan-to-value (LTV) of 60 per cent will pay just 1.95 per cent interest. There’s a £1,995 fee.
For 70 per cent LTV customers Chelsea Building Society’s tracker still looks attractive at base rate plus 1.69 per cent meaning you’ll pay 2.19 per cent until December 2013. This comes with a £1,495 fee.
Meanwhile Skipton Building Society’s two-year tracker, available for 60 per cent LTV borrowing, has a variable rate of 2.38 per cent for two years. It charges 1.88 per cent above base rate and has a £995 fee.
Topping the fixed rate best buy tables meanwhile is Leeds Building Society which is offering a rate of 2.29 per cent until January 2014. This two-year deal is for borrowers with a deposit of at least 30 per cent and comes with a £1,999 fee.
Meanwhile the Co-operative Bank announced it was cutting rates and fees on its five-year fixed-rate mortgage range on November 10.
Borrowers with a 25 per cent deposit will now pay 3.39 per cent on a five-year fixed-rate deal, 0.8 per cent lower than was previously charged. There are fee-free deals available for customers who hold a current account at the bank.
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