Are fixed rate mortgages right for you?

Lenders have launched some of the most competitive fixed-rate mortgages for a while. But what value do fixes offer – and with speculation about interest rates, is it worth hanging on for even better rates or is the wise decision to lock in now before it’s too late?

What is a fixed-rate mortgage?

A fixed rate is a home loan where the rate of interest you pay is fixed up front for a specified period – for example, 4.99 per cent for two years. This means that you know from the start exactly how much your monthly payment will be for that period. This security can be valuable to those who need to budget, like first-time buyers.

Are fixed rates good value at the moment?

Fixes will always represent the best value for borrowers who want to guarantee their monthly repayments – and for those who think interest rates are on the up. However, at the moment fixed rates offer relatively competitive prices in addition to security, with many offered at an average of 4.5 per cent. As Brian Murphy, lending manager of broker Mortgage Advice Bureau, points out, the average fixed rate in 2003 (when interest rates dropped right down to 3.5 per cent) was 4.32 per cent – not a million miles away from today’s fixed-rate offerings.

Andy Barr, a spokesman for Chelsea Building Society, also believes it’s important to remember this. “If you think the rates available are attractive now and if you can afford it now, then they’re valuable,” he says.

Are there lower-rate deals to come?

It depends on the rates that lenders can secure for their funding on the money markets. These rates are based on the City’s predictions on what interest rates will do in future, as they have started to edge up.

A few lenders, such as Chelsea Building Society, Northern Rock and Abbey, have increased the rates on some fixed-rate deals. However, lenders sometimes do this to prevent attractively priced deals from being oversubscribed.

There is potential for lower fixed-rate loans to come, particularly if housebuyers continue to stay out of the market. “The likelihood is that you’ll be able to get cheaper fixed rates later in the year,” says Ray Boulger, senior technical manager at broker Charcol. “But there’s a fine line between waiting and fixing straight away.” If you wait and are paying your lender’s standard variable rate (SVR), which can commonly be up to 2 per cent above current fixed rates, he explains, the better the fix has to be to compensate for this extra cost. Overall you’ll pay less on a tracker or discounted-rate mortgage at the moment, but the difference between these and fixes is not huge, Boulger adds.

On the other hand…

Some commentators take a different view. David Bitner, head of mortgages at broker Bradford & Bingley, says: “We have already witnessed the best deals. By April borrowers will start to see higher rates. If you can secure a two-year fix below 4.75 per cent or a five-year fix below 5 per cent by the middle of March, you’re definitely getting a good deal.”

Financial information provider Moneyfacts agrees. It says that it looks as though inflation will rise above the government’s 2 per cent target, which could signal a greater reason for a rate rise. The very recent increases in fixed rates supports this, it claims.

One thing to consider is the forthcoming election. In theory an election shouldn’t influence interest rates as the Bank of England is independent, explains Murphy. “However, if you look back in history we never go into an election period with rate rises,” he says. Remember also that even the experts’ views on interest rates are informed speculation and not guaranteed predictions.

What about trackers or other alternatives?

Capped tracker mortgages could be an alternative in a time of interest rate uncertainty. They can provide the best of both worlds, with a ceiling rate for security, but the potential to benefit from any rate falls. However, if the underlying rate is linked to a lender’s SVR, you don’t automatically benefit, warns Boulger. The key is to find a tracker or discounted underlying rate, he advises.

If you do decide fixed rates are for you, consider your personal circumstances in deciding which product to take, not just the rate. If you know you’re likely to move within the next two or three years, for example, don’t get locked into a long-term fix.

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