Should you switch to a fixed-rate mortgage?
Investment Director – The Fleet Street Letter
David Stevenson Dec 20, 2011
Mortgage rates have been rising recently, despite the fact that the Bank of England (BoE) rate is still frozen at 0.5%. Why, and what should you do about it?
We’re now seeing the fallout from the eurozone crisis land on our shores. Banks, in Europe in particular, are concerned about ‘counterparty risk’. In other words, they’re becoming more reluctant to lend cash to each other in case they won’t get it back when it’s needed. This is despite the world’s major central banks pumping more money into the system via quantitative easing.
Britain’s banks are no different. Libor, the London interbank offered rate, or the rate at which banks lend to each other, has climbed steadily since 2009. But over the last three months, as the eurozone crisis has intensified, the rate has risen. Three-month Libor is now at its highest level for two and a half years at 1.1%. That compares with the BoE’s official bank rate of 0.5%.
And banks aren’t just more worried about lending to each other. They’re less keen to lend to customers too. So they’re putting up the price of British mortgages. For the moment, trackers are the main target area. But the cost of fixed-rate home loan deals could soon be on the rise too.
“It’s wholesale rates, not bank rates, that determine tracker and fixed-rate mortgage deals,” says Paul Farrow in The Daily Telegraph. If the eurozone crisis gets worse, mortgage rates could rise at a faster rate – and mortgages prove harder to get. Furthermore, British banks may be forced to cut lending because they’ll have to write off bad eurozone debts. “The first sector to be hit will be higher loan-to-value mortgages,” says Ray Boulger of mortgage adviser John Charcol. So borrowers with small deposits will have fewer options.
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A return to recession in Europe and Britain, plus central bank action to curb higher bank funding costs, should limit increases in Libor. But even so, mortgage rates are already so low that they can hardly drop further. So if you were considering it anyway, there’s little to be gained by delaying switching to a ‘fix’. “There are plenty of competitive five-year, fixed-rate deals available,” according to Melanie Wright of Moneysupermarket.com.
HSBC is offering the lowest at just 3.28%, with a £1,999 arrangement fee if you have a deposit of at least 40%. Chelsea Building Society has a 3.39% deal plus a £1,495 fee for a deposit of 30%. ING Direct offers a five-year fixed-rate at 3.89% if you can put down 40%, or 3.99% with a 25% deposit. Both of the ING mortgages include basic valuation and legal work, and there are no arrangement fees.