Settle down with the right mortgage

Fixed-rate mortgages are, as a rule, the steady, sensible and relatively unexciting sort of mortgage. Compared to tracker mortgages, for example, which offer rates that can increase or decrease at any time, fixed rates act as an insurance against future rises because you know exactly what rate you are going to pay for a set period.

These loans allow you to fix your mortgage rate, for example, for five years at a set rate of 4.74 per cent and know that your monthly repayments will not change over that time before reverting to the lender’s standard variable rate (SVR).

These loans can be popular with first-time buyers with tight budgets who want to know exactly what their payments will be. Lenders may also be far more willing to stretch income multiples on fixed-rate mortgages because the payments are fixed, so borrowers shouldn’t get any surprises.

Fixed rates may also appeal to buy-to-let landlords who want to be sure rental payments will cover their mortgage, and to people who want to set their monthly payments at a certain level.

The downside risk, on the other hand, is that once you fix your rate, the Bank of England base rate can always cut rates, leaving you with an uncompetitive mortgage rate, relatively speaking.

How low can rates go?

Fixed rates have become extremely well priced of late, and fierce competition among mortgage lenders is producing some really good mortgage deals Colin Dale, head of lending at Skipton Building Society, says: “Lenders will try to steal a march on the competition, and it’s also the time of year – in late summer and autumn – just before things go quieter heading up to Christmas, when lenders bring out their best rates to attract customers.”

There are, too, roughly 600,000 mortgage borrowers who borrowed incredibly low two-year fixed rates in the second half of 2003 at between 3.89 and 4.45 per cent who have already or are just about to reach the end of their deal term. Many lenders have been doing their best over the past few months to attract these borrowers.

Also, for the first time in quite a while, two-year fixed rates, for example, cost less than two-year discount mortgages. The reason for this is that swap rates – banks’ predictions on the future direction of interest rates – tumbled sharply a couple of months ago. As soon as swap rates drop, lenders can afford to cut their mortgage rates.

Historically, fixed rates have always cost a little more than discount mortgages, with slightly higher application fees or reservation fees as well as rate, but this position also seems to have shifted, with discounts or tracker fees rising to meet fixed rates, says Murdo McHardy, product development at Scottish Widows Bank. “Booking or arrangement fees of up to £500 are about the same for some variable and discounted rate trackers now,” he says.

However, Dale says it’s also important to remember that the lower the upfront rate – particularly for loans that feature in best-rate tables – the higher the fee.

Interest rates – what next?

Swap rates are notoriously hard to predict, so borrowers and the industry look at which way interest rates are going. Market commentators agree that the next move is likely to be a 0.25 per cent cut, but there is little agreement on when it will come (see p23). McHardy says: “Two-year fixed rates are by far the most popular products because people are still not convinced over which direction interest rates are going.”

However, when it comes to making the decision over whether to go for a fixed or tracker rate, for example, the economic outlook is just one of many factors you need to think about.

John Mills, managing director of Westpoint Mortgage Management, insists that you should always think about your own circumstances before making any kind of decision: “With fixed rates, if the decision you made was correct at the time you made it, it was the right one for your circumstances and you should never beat yourself up about it afterwards.”

“ Never speculate on rates,” adds Mills. “We have a client who agreed a large £500,000 mortgage the day before the 0.25 per cent rate drop in August. He called the next day to say he still thought he had made the right decision because he wanted the payment certainty and, in contrast, wouldn’t have been happy if his payments had risen with a mortgage of that size.”

Another thing to think about is how long you want to fix your payments. Most mortgage loans are ‘portable’ nowadays, which means you can take them with you when you move, which is useful. But you may not want to fix for longer than two years because you suspect interest rates may be about to fall. But those who do choose to fix for longer may well end up paying lower fees overall, because every time you remortgage you pay another set of application fees.

Tanya Jackson, spokesperson at Yorkshire Building Society, says: “We have launched several five and ten-year fixed rates recently which have been popular. So we think some people may have had enough of remortgaging every two years and are going for a longer mortgage term. It’s the kerfuffle really. Since regulation, mortgage interviews are much longer so it’s also far more time-consuming to shop around. Time is a really precious commodity for many.”

Are trackers a better bet?

Because interest rates are expected to fall over the next 12 months thoeretically, tracker loans could be a better bet.

But Ray Boulger, senior technical manager at John Charcol, says: “That depends very much on your own risk profile. At the moment there are a number of fixed-rate deals offered at less than bank base rate – for example 4.24 per cent from Alliance & Leicester or 4.29 per cent from Halifax – but the difference between these and the pay rates on discount loans is not huge enough to worry about. Make a decision on your own circumstances.” He adds:“The cheapest mortgage is probably a tracker over the next two years, but what price peace of mind?”