It was the happy new year no one wanted. Observers had long predicted increases in the Bank of England base rate this year, and most believed they would come in February. But when the first rise came in mid-January, it sent hard-pressed borrowers scurrying to find a way to survive rate rises.
Where have all the fixed rates gone?
Lenders responded quickly. Major lenders including Nationwide and Halifax increased their variable rates by 0.25 per cent. The best deals on fixed rates some under five per cent – disappeared within days, including those from Egg, Cumberland and Skipton. Portman replaced its 4.99 per cent best buy fixed rate to replace it next day at 5.34 per cent, a 0.35 per cent rise.
With a further rate rise still on the cards for 2007, those consumers on a tight budget will need to act quickly before more of the current best buy fixed rate deals vanish, said Moneyfacts mortgage analyst Julia Harris.
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But grabbing at a fixed rate deal to stave off the worst of further rate rises is a mistake, says Cath Hearnden, My Mortgage Direct director. The time to fix is when a rate rise is a possibility, not a certainty thats when the best deals can be snapped up. As always, there will be those who bolt the stable door too late.
With more rate rises expected this year, borrowers wonder how high rates will go. Observers believe that rates could reach 5.75 this year, with some suggesting they could go as high as six per cent though others believe rates may also fall later this year.
Yet budgeting for rate rises is good discipline, believes Ray Boulger, senior technical manager at brokers Charcol, and a great opportunity to make sure you have the best deal. Check your existing deal, he says, because if you have early repayment charges, it makes no sense to move now.
What to do now
But existing borrowers may have more choices than they think, believes Boulger, who points out that Halifax and Woolwich customers have flexible mortgages which will allow them to make underpayments if they need to. Home owners who have previously made overpayments could also take a payment holiday, Boulger adds: But dont miss a payment, or you will damage your credit rating which will cost you more in the future.
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For anyone nearing the end of a current deal, there are still some good fixed rate deals out there, says David Hollingworth, spokesperson for brokers London & Country: even six per cent deals are a world away from the 14 and 15 per cent borrowers were paying a decade or so ago.
And if you have a fixed rate deal with a year to run, Hollingworth adds, then this is a good time to think ahead: Many will allow overpayments of up to 10 per cent without penalties, and that helps you reduce the level of debt within the security of a fix, he says.
And if you’re struggling
Anyone struggling to meet payments should talk to their lender, he adds. One option may be to switch to an interest only mortgage for a short period, says Hollingworth, while recognising that you are not reducing the debt that way.
Extending the repayment period of the mortgage is another option. And a capped deal on a tracker mortgage will give peace of mind, Hollingworth adds.
For hard-pressed borrowers, every rate rise hurts: a home owner with a £110,000 repayment mortgage will pay £643 a month at five per cent, Moneyfacts points out, but an extra £16 at 5.25 per cent, £32 at 5.5 per cent and almost £49 extra at 5.75 per cent.
Or finding extra sources of income: the Governments Rent a Room scheme means that the first £4,250 is tax free, Boulger points out, though many families will baulk at sharing their home with a stranger.
For younger borrowers without rooms to let, options include more overtime at work or even taking on a second job. With luck, those who say that the outlook for borrowers is good, and that inflation is set to fall, have got it right and in the meantime, there are plenty of ways to ride out this years interest rate rises.
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