Borrowers in a fix

When it comes to mortgages, the most popular type to take is a fixed rate. According to recent figures from the Council of Mortgage Lenders, 89 per cent of first-time buyers and 73 per cent of homemovers take out fixed-rate deals – and typically for short periods of two years. Two years can pass with frightening speed but borrowers coming to the end of a fixed-rate deal this autumn have another shock in store – it’s going to cost them to move mortgages.

New rates for old

In September 2005 the Bank of England base rate stood at 4.5 per cent. Two years later, in September 2007, it’s pegged at 5.75 per cent, with homeowners braced for a rise at every turn. The effect this has had on fixed-rate mortgages has been stark, says David Hollingworth at mortgage broker London & Country. “Back then, you could have got a two-year deal for 4.25 per cent, whereas now you would be looking at least 5.5 per cent.” But worse still is paying your lender’s standard variable rate (SVR), which your mortgage will revert to at the end of the fix if you don’t remortgage in time. The average cost of an SVR is now an unwelcome 7.6 per cent, according to Moneyfacts.

A new landscape

Another way that the fixed-rate landscape has changed in the last two years is that there are more long-term deals available. That’s because, in the summer of this year, Chancellor Alistair Darling called on lenders to offer more long-term fixes as, in his view, this would stabilise a runaway housing market. Most experts disagreed, but a spate of lenders, including Nationwide, Manchester, Yorkshire and Norwich & Peterborough building societies, nevertheless launched, or relaunched, 25-year fixed-rate deals.

The benefit of these mortgages is that the tie-in periods are shorter than the term of the fix – a kind of flexibility that has only recently become available. For example, Nationwide has a 25-year fixed-rate deal priced at 6.29 per cent but with a tie-in period of just 10 years. Manchester Building Society’s 25-year deal comes with no tie-ins at all, although you will have to pay a 2 per cent arrangement fee, which you can reclaim if you choose to lock in for the long term.

The ‘credit crunch’ effect

Borrowers about to fall off the edge of their cheap short-term fix may be even more disconcerted in light of the recent Northern Rock debacle. The bank recently had to be bailed out by the Bank of England after encountering liquidity problems arising from an increase in property repossessions in America. The event triggered a ‘credit crunch’ that resulted in many lenders, including Alliance & Leicester, Bank of Scotland and Halifax, hiking up the price of their tracker mortgages by between 0.1 and 0.2 per cent.

But, confusingly, while variable deals are going up in price, fixed-rate mortgages are edging down. Robin Amlôt, senior editor of Moneyextra.com, explains: “What happened to Northern Rock was a ‘maturity mismatch’. This is fine if you’re dallying with a toyboy but not so great if you’re trying to cover long-term financial commitments by borrowing from the money markets using LIBOR (the rate at which banks lend to each other) that hit record levels.

“However, at the same time, the complex nature of the wholesale money markets has seen two-year swap rates, on which fixed-rate mortgage packages are based, come down. That has meant lenders have been able to offer fixed-rate mortgage packages more cheaply, leading to the bizarre situation where some mortgage rates are coming down at the same time as others have been rising.”

For example, the Woolwich lowered its five-year fixed rate by 0.5 per cent to 5.59 per cent from 25 September. The two-year fix, also priced at 5.59 per cent, has been pegged down by 0.3 per cent. Andy Gray, head of mortgages for the Woolwich, says: “This means that borrowers who are on very competitive two-year deals that finish this autumn are going to see a lower increase in their mortgage payments than they might have feared a month ago.”

Abbey has also lowered rates on a selection of its new two-year fixed products by between 0.05 per cent and 0.21 per cent from 18 September. “As with our other mortgages we change our rates in response to the market and our competitors,” says Nici Audhlam-Gardiner, head of mortgages at the lender.

Where now: fixed or tracker?

But none of this answers the question of whether you should remortgage to a fixed or a variable deal when your cheap fixed rate ends. “Fixed rates have edged down again but are nowhere near back where they were priced this time two years ago,” says Hollingworth. “And if it looks that cheap, there will be a snag.”

For example, the mortgage may tie you in for longer than the fixed-rate deal runs, meaning you are then stuck paying the lender’s expensive SVR. Alternatively, very cheap fixes tend to come with eye-watering arrangement fees, usually as a percentage of the loan, says Hollingworth. He gives the example of Northern Rock’s two-year fixed-rate mortgage priced below the odds at 5.29 per cent – but that also comes with an arrangement fee of 3.5 per cent of the loan.

The same principle applies to two-year trackers. Yorkshire Building Society’s two-year deal, currently priced at 4.99 per cent, comes with a 2 per cent arrangement fee. The cheapest deals may also be reserved for purchasers rather than remortgagers, such as Nationwide’s two-year tracker payable at 5.38 per cent.

Which mortgage to take should hinge on your circumstances rather than price or perceived movements of interest rates, says Hollingworth. “If you need security of payments, taking another fix – albeit more expensive – is really your only option. And although you won’t benefit if rates go down, as you would with a tracker, no one – including the governor of the Bank of England – can predict what is going to happen to the base rate anyway.”