Mortgage Informer

Should you fix your mortgage now before a rate shock?

Fixed-rate mortgage deals are expected to hit 7% soon — the highest level for 15 years — but for the moment they are still better value than trackers.

Homeowners are being advised to grab a fixed mortgage now or face rates above 7% on two-year deals after a sharp turnround in interest-rate expectations last week.

Markets moved to price in two rate rises before the end of the year, which would take Bank rate to 5.75%, after Ben Bernanke, the US Federal Reserve chairman, and Jean-Claude Trichet, the European Central Bank president, warned of mounting inflation pressures.

Economists said such a move would be unlikely and most still expect one more cut to 4.75% by the end of the year, although David Miles of investment bank Morgan Stanley, who is also an adviser to the Treasury, thinks rates will have risen to 5.25% by April next year.

Experts said two-year fixes might now top 7% for the first time since interest rates started coming down from double-digit levels 15 years ago, as lenders moved to price in expectations in the money markets.

The average fixed-rate mortgage last month for a borrower with a 25% deposit was 6.27%, according to the latest data from the Bank of England — nearly one percentage point above the cost of funding in the wholesale markets, known as swap rates.

With two-year swap rates now at 6.34%, two-year deals could soon go to 7.31% assuming that margin remains the same.

Ed Stansfield of Capital Economics, a consultancy, said: “If the recent rise in swap rates is sustained, two-year fixed mortgage rates are likely to approach 7% in the next few months. With demand in the market already so weak, that would represent another huge blow to the housing-market outlook.”

Homeowners felt the pinch almost immediately as Royal Bank of Scotland (RBS), which owns NatWest and the One Account, said on Thursday it was raising rates for new customers across most of its products.

Existing customers with a NatWest offset or One Account mortgage were also hit with a 0.25 percentage point interest rate rise to 6% — a ?30 a month increase in the cost of a ?200,000 mortgage from July.

Melanie Bien of broker Savills Private Finance said: “RBS can do this even though Bank rate is remaining on hold for now because these accounts are linked to a standard variable rate. It is worrying to think what measures banks will take if rates actually rise.”

Abbey responded to the rise in swaps by targeting two-year fixes for borrowers with 25% deposits. From today, it increased the rate by 0.35 points to 6.49%. It also axed deals above 90% of the value of the property and withdrew its standard variable rate for new borrowers.

Woolwich raised two- and five-year fixes by as much as 0.3 points, while Halifax increased the rate on its three-year fix for those with less than 10% deposit by 0.1 points. It introduced better deals for borrowers with 40% equity, however.

Brokers are now advising borrowers who want a fix to take one out as soon as possible, especially as they are cheaper than trackers at the moment.

The popularity of fixes has increased as borrowers have sought certainty, according to the Council of Mortgage Lenders. Nearly 60% of borrowers fixed in April, up from 54% in March and the largest proportion since December.

For example, the cheapest fix from First Direct at 5.49%, available to borrowers with a 20% deposit, would cost ?1,226 per month or ?17,968 over the two-year term for a ?200,000 loan, including the fee of ?1,498.

By comparison, the best two-year tracker from Mansfield building society at 5.9%, available to borrowers who have a 25% deposit, would cost ?1,276 a month or ?19,238 for a ?200,000 home loan over the two-year term, including the ?999 fee and factoring in a quarter-point rise in interest rates at the start of next year. The First Direct deal is therefore ?1,270 cheaper.

Even if economists are right and we get another 0.25-point cut in rates, the tracker at 5.65% would still be more expensive than the fix.

Bien said: “Fixes appear to be cheap compared with trackers, but this is unlikely to last long. Borrowers who are looking for the certainty of a fixed rate should move quickly to secure a deal as lenders are raising the price of some of their most competitive fixes.”

Buy-to-let lenders continued to pull the plug on deals last week. Mortgage Express, owned by Bradford & Bingley, the biggest buy-to-let lender which saw its profits halved this year, withdrew its most competitive deals.

The Halifax Bank of Scotland-owned BM Solutions, the second-biggest buy-to-let lender, increased rates by up to 0.2 points.

Britain’s biggest mortgage lenders have persisted in withdrawing products, tightening criteria and raising rates despite efforts by the Bank of England to encourage banks to lend more, including swapping government bonds for mortgages.

Concerns are mounting that the scheme, thought to have ballooned to ?90 billion from the Bank’s starting offer of ?50 billion, is not working.

Sir James Crosby, the former HBOS chief executive, has been asked by Alistair Darling, the chancellor, to prepare a report on the mortgage freeze.

It is understood that Crosby has heard evidence that the liquidity programme has failed to kick-start the retail mortgage market as well as several proposals to overhaul the scheme.

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