Interest rate cut

A mortgage fix could pay off in the long term
It all depends on what you want from your mortgage, says Kara Gammell

By Kara Gammell
Last Updated: 3:04PM GMT 05 Mar 2009

Interest rates may be at an all-time low, but many borrowers are still struggling to snap up competitive mortgage deals.

Those looking to remortgage, or take out their first loan, may be tempted by some of the cheaper tracker rates on offer – but many advisers say they may be better off in the long run by opting for a more expensive fixed-rate deal.

Melanie Bien, director of independent mortgage broker Savills Private Finance, said: "The best mortgage rate for you will very much depend on your own particular circumstances."

Some borrowers are currently paying low rates because their loan is linked to the lender's standard variable rate (SVR). But sticking to an SVR could backfire. Matt Andrews of Moneyworkout said: "Beware of the SVR handcuffs. If you are thinking of sitting on your SVR, you must also think about your property value."

As property values fall the percentage of your borrowing against your mortgage – loan to value or LTV – increases, he said, and this affects borrowers in two ways.

"Firstly, many lenders tier their interest rates, with a higher rate for a higher loan to value. You could slip into a more expensive category if you wait. And many lenders are not lending if your loan to value is greater than 80pc. Those with less equity could find it impossible to remortgage, and find themselves handcuffed to the standard variable rate, hoping it doesn’t go up."

He added: "You may have a fantastic SVR now, but look at your loan to value, look at property prices in your area and how they are moving, think about your needs over the next few years, and if your mortgage may cross the 80pc boundary with the fall in property prices, you may want to consider fixing now, before its too late."

Fixed-rate deals also offer security to first-time buyers and those whose budgets are stretched, as they have the peace of mind that monthly mortgage payments won't suddenly rise.

Ms Bien said: "While two-year fixes tend to be the cheapest fixed-rate deals and the most popular, it may be worth fixing for a longer period. While interest rates remain low now – and may fall further this week – there is no guarantee that they will be as low two years from now when you need to remortgage."

In fact, many economists are expecting rates to rise over this period, particularly if, as expected, inflation starts to pick up again over the medium term. What's more, few are expecting house prices to recover in the near future. This could leave those remortgaging in two years' time in a difficult position, with less equity in their home and interest rates rising.

Ms Bien said: "If lenders are still not offering mortgage to those with less than 10 per cent equity in their home, you could find it difficult to remortgage, leaving you at the mercy of your lender's standard variable rate."

For first-time buyers, a very competitive deal available is the five-year fixed rate from the Post Office at 6.01 per cent. This is available to those with just a 10 per cent deposit and has a £599 fee. If you can afford to borrow only 85 per cent of your home's value, Leeds Building Society offers a five-year fix at 5.25 per cent with a £199 fee.

For those who don't need the certainty of a fix, a base-rate tracker may look more attractive as starting rates are significantly lower. Many are expecting interest rates to remain low for a year or 18 months, giving home owners the benefit of cheaper monthly mortgage payments.

However Ms Bien said that borrowers should be wary of trackers that have penalties after three years, as these may give borrowers less flexibility to switch if rates start to rise sharply.

Woolwich currently offers a tracker charging 2.99 percentage points over the Bank Rate, for the term, giving a current rate of 3.99 per cent. There will be penalties to pay if you remortgage within three years. This rate is available up to 70 per cent loan-to-value (LTV) with a £995 fee. Nationwide has a two-year tracker at 2.83 percentage points over base, giving a rate of 3.83 per cent with a £995 fee, available up to 60 per cent LTV.

Ms Bien said: "For those with significant equity in their home of at least 40 per cent, the pick of mortgage deals are available." Alliance & Leicester, for example, offers 2.04 percentage points above the base rate for two years, giving a rate of 3.04 per cent. However home owners pay a fee equivalent to 2 per cent of the sum they are borrowing.

This is only available to those with 60 per cent LTV.

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