Quickie Guide to Fixed Rate Mortgages

Following our recent article on the expected freeze on interest until 2014, we thought we would give you a brief guide to fixed rate mortgages.  If you’re thinking of buying a new home now then a fixed rate mortgage could give you peace of mind about your monthly payments for up to five years.  More companies are now releasing 5 year fixed rate products as well as tracker mortgages which track the Bank of England base rate.

When you take out a fixed rate mortgage your rate, as the name suggests, is fixed for a set period of time.  You can usually choose to fix your mortgage for 2,3,5 and in some cases 10 years.

To find the best mortgage product for your situation we always advise speaking to an independent financial advisor or mortgage broker.  They will give you a ‘whole of market’ view so that you get the best deal.

Advantages of a Fixed Rate Mortgage

Choosing a fixed rate mortgage will ensure that your monthly mortgage payments are the same over the fixed rate period.

Let’s say you took out a 5 year fixed mortgage in 2011 and interest rates increased in 2014, as they are predicted to do, your mortgage payment would not rise as a result and would stay the same until 2016 when your fixed rate runs out.  It really is that simple and for many people, a fixed rate mortgage is a blessing.

Disadvantages of a Fixed Rate Mortgage

Naturally, there has to be a little bit of a catch and here it is. Fixed rate mortgages do incur set up fees and these can be quite high.  That makes it even more important to shop around for the right mortgage at the right price.  The set-up fee can usually be added to your total balance and monthly payments.

It’s usual with a fixed rate mortgage that you will be tied to that product until the fixed rate period expires.  If you find a change in your circumstances causes you to review your current mortgage, or that you need to end the fixed rate term early, you will normally be forced to pay a redemption charge.  This can sometimes equate to thousands of pounds depending on your mortgage amount and the terms of the product.   Again, obtaining mortgage advice at an early stage could help you to avoid this type of situation.

If you’re looking for protection against a rise in interest rates then a fixed rate product is for you.  However, it’s also important to understand that interest rates can go down and that if they do, you won’t be able to take advantage in the lower rate.  Right now, interest rates are at a record low 0.5% and have been that way for 28 months now.  This rate is now not expected to rise until 2014 so it’s a great time to look into fixed rate products or even tracker mortgages which track the Bank of England base rate.

To fix or not to fix, that is the question

by Andy Golding, Chief Executive of Saffron Building Society

The question that every borrower wants to know the answer to is whether to tie themselves into a fixed rate mortgage deal, and at least get certainty, or whether to take a gamble on a variable rate and hope it pays off.

The answer is all a matter of what happens to interest rates. In the strangest set of economic circumstances for at least 60 years, there are many opinions but very few facts to go on.

Economists use the phrase “balance of probability” quite a bit, so what is the balance of probability for the direction of UK base rates?

Interest rates are used by the MPC to control inflation. The basic theory being that rising rates take capacity out of the economy and falling rates put it back in. With rates at an all time low and having been so for quite some time now, plus the impact of the significant Quantitative Easing programme, both designed to stimulate the economy out of recession, you could expect that now that the UK is back into growth again, that inflation could start to rise quite rapidly.

The latest readings show that high street sales picked up more than expected and the Bank of England’s survey of regional agents showed some relaxation in the availability of credit, some signs of rising pay and continued growth in the manufacturing sector.

The target CPI measure of inflation hit an eighteen year high of 3.7% in April, though has since dropped slightly to 3.4%, is still comfortably above the target rate of 2%. The RPI measure shows the cost of living having increased by more than 5% over the last year. The rise has been largely driven by the reversal of the VAT reduction, the weakness of sterling and higher fuel costs.

However, the Bank remains confident that the CPI measure will drop back below 2% within a year, as was outlined by the Governor in his letter to the Chancellor following the inflation release. The decision to keep monetary policy on hold has been unanimous until June’s MPC meeting, where one committee member voted to raise base rate to 0.75%. The MPC are also highlighting the need to tackle the fiscal deficit, although the Governor welcomed the plans he had seen last week. A credible deficit reduction strategy would increase the likelihood of rates remaining lower for longer.

The risks to the Bank’s view are that energy prices continue to rise as they have been doing, spurred on by speculators and Chinese consumption, (whose economy has returned to double digit growth) and VAT increases introduced in the emergency budget, coupled with strong exports and a continuing relaxing of credit. These factors together would push inflation higher still and would therefore put pressure on the Bank to raise rates.

So do you fix or not? Rates could rise quicker that the Bank are currently predicting. Probably not much, if at all in 2010, but potentially in 2011.

As a mortgage borrower, fixing now for, say, 5 years provides certainty of price. Fixed rates are unlikely to get any cheaper.

That said even best buy fixed rate mortgages are significantly more expensive than best buy tracker or variable rates. If Mervyn King is right, you will take a hit on additional cost unnecessarily. Either way it’s a gamble. But even at 50/50 odds, ask yourself whether you could afford your mortgage if rates went up 3.5%. On a £150,000 interest only loan that is an increase of £437.50 per month!

There is no right answer, which is why Saffron offer both fixed and tracker mortgages in order that borrowers can choose whichever mortgage they feel most comfortable with. The advice we give is always to consider what you could afford if your payments increased, and whether that increase would be unfortunate or unfeasible for your circumstances.

Saffron Building Society is a regional building society and has been providing savings accounts and mortgages to communities in the East of England for over 160 years. They offer a range of fixed rate mortgages and tracker mortgages. They have over 120,000 members and are the ‘most followed’ Building Society on Twitter! Visit us at www.saffronbs.co.uk or follow us @SaffronBS

Are you wondering: what will the interest be on my mortgage this year?

The upside of the credit crunch fuelled recession has been, for many British families, lower mortgage repayments on loans. Despite the media’s love for doom and gloom these lucky souls have been going about their business not believing their luck. The mortgages in question are those calculated at the lenders’ standard variable rate (which may or may not be tied to the bank of England Base rate) or tracker mortgages (About 1,500 C&G customers on tracker mortgage at 1.01% below Bank base rate have been paying no interest at all on their home loans since March 2009! according to Citywire).

Historically low interest rates have meant that some homeowners have actually found an extra few hundred pounds in their bank account each month as a result of the Bank of England’s efforts to buoy the housing market and avoid an even greater disaster of a recession.

Those who have a mortage with a lender who ties their variable rate to the BoE base rate have been the happiest, or those with tracker mortgages.

However some banks (such as Standard Life) have an arbitrary standard variable rate that they set themselves. (Remember that kid that wouldn’t let you play with his ball unless you agreed to his version of the rules?)

Some of these lenders whose SVR is not tied to the bank’s rate are starting to hit many UK homeowners with a rate rises in an efforet to recoup losses made elsewhere reports citywire this week.

Our own Professional Landlord recently sold a house due to his mortgage company (Standard Life) keeping their SVR for low LTV customers at 6.67% despite the base rate sitting at 0.5%. A remortgage deal for an existing customer? Why no sir, those are reserved for our special new customers only sir.

In fact Buy-To-Let investors tend to fare worst in these circumstances and are seen as fair game by lenders as their interests are also commercial. Or so the argument goes.

A quick and dirty list of Lenders’ SVRs shows some disparity:

Marsden building society 5.95%
Mansfield building society5.59%
Ipswich, Scottish and Cambridge building societies and Accord Mortgages, most of which are well over 5%.
Skipton SVR 4.95%
Norwich & Peterborough 4.85%.
Natwest 4.00%
Santander SVR 4.24%
Nationwide Building Society SVR 3.99%
HSBC SVR 3.94%
First Direct SVR 3.69%
Halifax standard variable rate (SVR) 3.5%
Barclays SVR 2.49% (via the Woolwich)

Sources: Citywire & Mortgage Rates

Most analysts agree that the BoE base rate will rise from 0.5% this year, but moderately and towards the end of the year – into 2011 looks a bit far out from here to say but again moderate increases are expected.

So what can we learn from this? If you’re remortgaging or getting a mortgage then tracker deals inherently are a gamble of sorts and you could get lucky like those C&G customers above, or you could get unlucky and we could enter a period of high inflation – or something in between. If you are taking a new fixed rate deal then look carefully at how the lenders’ SVR is calculated – is it the arbitrary judgement of the boardroom or is it contractually tied to the BoE base rate?