Mention fixed-rate mortgages to anyone who took one out in mid-2008 and you’ll probably not get the politest response. They face being locked into a rate of 6%-6.5% for another 18 months, at a time when the Bank of England base rate has plunged to 0.5%, forcing down the cost of some tracker mortgages to zero. Borrowers on many of the biggest lenders’ standard variable rates (SVRs) have also benefited, with the likes of Halifax, Nationwide, and Skipton Building Society all passing on the latest cut.
But how long can this mortgage nirvana last? After all, not only has the Bank been slashing interest rates, but it’s also just embarked on a policy of ‘quantitative easing’. That’s bank-speak for printing money, up to £150bn of the stuff, to prevent deflation – ie, ongoing falls in consumer prices and house values.
We can’t know for sure when, or even if, this will work. But it’s bound to make the money markets more jittery. And that means there’s a strong possibility that the next move for UK interest rates, and specifically the ‘swap’ rates on which many mortgage products are priced, could be up, rather than down. And not all lenders are cutting rates. State-owned Northern Rock has just flagged its return to the market, pledging £14bn of fresh loans over the next two years, but it has yet to quote newly competitive rates. Last week, the Woolwich – now part of Barclays – upped the cost of its home-loan deals by up to 0.3%, citing rising funding costs.
Ray Boulger at mortgage broker John Charcol tells The Sunday Times that fixes could fall as low as 3.5% from here. Yet “sooner or later rates are simply going to have to rise, and rise sharply”, he adds. “While convincing someone who’s currently paying next to nothing to take a fixed-rate between 4% and 5% is as challenging as selling ice to Eskimos, in the long-term there’s every possibility they’ll be better off.”
So what’s the best fix around now – and should you switch from your lender’s SVR to take it? Abbey has a five-year 3.95% fixed-rate deal with a £995 fee. The maximum loan is £250,000 and a 40% deposit is needed. With even the most bearish forecaster (Seema Shah at Capital Economics) expecting fixes to bottom at 3%, that deal looks good. But there’s another reason to act quickly. As Simon Gammon at Knight Frank Finance puts it, with property prices still falling sharply, “people who may have a comfortable amount of equity now could find they don’t qualify for the best deals in a year’s time – an argument for getting a valuation and remortgaging as soon as possible”. The 40% deposit means Abbey’s deal is probably already out of reach for many. London & Country’s David Hollingworth suggests Britannia’s five-year 5.24% fix with a £999 fee, catering for loans-to-value of up to 85%.