It's time to fix your mortgage

By Associate Editor David Stevenson Jun 19, 2009

David Stevenson

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Amid all the speculation about where prices might go next, another part of the property market is a shoe-in to turn up. "Borrowers should brace themselves for a wave of steep mortgage-rate increases over the next few days," says Sharlene Goff in the FT. Ray Boulger at John Charcol agrees: "There's no question fixed rates will go up. I would be surprised if any of the main lenders did not put rates up over the next week."

The damage isn't being done by a massive increase in demand for loans forcing up the price. Sure, approvals rose 16% in April, but they are still 28% lower than last year, according to the Council of Mortgage Lenders. Meanwhile, growth in what the Bank of England quaintly calls "total lending to individuals secured on dwellings" – i.e. mortgage lending overall – is up just 1.6% over the last year.

The real problem is 'swap' rates. These play a huge part in determining the cost of fixed-rate lending for banks, and hence for us. Two-year swap rates have jumped from below 1.86% a month ago to 2.37%, seeing one of their biggest single one-day rises for ten years in early June. Five-year swap rates have risen even more sharply.

The reason is that they're set by the money market, which is terrified about the sums our government will be borrowing over the next few years. And the higher that demand for extra cash, the higher the price – in this case the interest rate. That in turn pushes up fixed-rate deal costs everywhere.

For example, Abbey and Alliance & Leicester have lifted their fixed rates by between 0.25 and 0.5%, Lloyds Banking Group has upped its Cheltenham & Gloucester rates by up to 0.7% and Nationwide has hiked its entire fixed-rate range by up to 0.86%.

So, what to do? "If you're locked into a relatively low mortgage rate then chances are you should remain with your current arrangement for the foreseeable future," says Financialadvice.co.uk. However, "if you're currently on a variable mortgage rate, then now may be the time to consider a fixed-interest mortgage", they add. One snag is that in the current climate, fixing is a lot easier if you have a healthy chunk of equity in your house and therefore a modest loan-to-value ratio.

Currently, the cheapest fixed-rate deal on the market is First Direct's 2.99% two-year deal for between £30,000 and £400,000, but it's only available for up to 75% loan-to-value (LTV). Fees are £499 to book, and £995 to arrange. Chelsea Building Society is offering the lowest three-year fixed rate at 3.84% until June 2012. The deal is available on loans between £60,000 and £500,000, for up to 65% LTV. There's also a £995 arrangement fee. But get your skates on, as the best deals won't last long.

 

Published in Personal finance | More articles by David Stevenson

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