Get ready for mortgage rate rises

The only way to guarantee your mortgage rate is to fix it.

Millions of mortgage borrowers have enjoyed almost two years of record low interest rates since the Bank of England reduced its Base Rate to 0.5% in March 2009.

As a result two things quickly happened. Borrowers on a variable rate mortgage, such as a standard variable rate (SVR) or a tracker mortgage, saw their monthly mortgage repayments plummet.

Even many those who were on a fixed rate at the time have now come to the end of that deal and reverted to their lender’s SVR -- usually with a corresponding drop in repayments.

As a result of this borrower apathy quickly took hold, since variable rates, and particularly long- term deals like SVRs or lifetime trackers, were unbelievably cheap, especially when compared to new deals.

So why spend the time and hassle searching the market for a remortgage when it would be probably be more expensive than your lender’s reversionary rate? Plus you would have to pay an arrangement fee.

Doing nothing and staying put was a no-brainer and it is little wonder that remortgaging business has fallen off a cliff over the last two years.

But is it time we looked again at the mortgage market?

Too complacent

Trade association, IFA Promotion, reckons that the record low Base Rate has created a ‘false sense of security’ for seven million homeowners, half of whom admit they haven’t even reviewed their mortgage since the Base Rate fell to 0.5%.

And yet a mere quarter point rise in interest rates -- to 0.75% -- on  a typical £150,000 mortgage would add £375 to the annual interest they pay.  

Indeed, now may be a great time for canny borrowers to remortgage before rates rise and all the good deals disappear.

Switch now or regret it

There are two reasons that remortgaging is becoming more attractive.

Firstly, people are getting jittery about a Base Rate rise. The consensus of the Reuters poll of 60 leading economists is that the first rate rise will be in October this year. But rampant inflation figures have lead many to suggest it could come sooner. And the minutes from the last meeting of the Monetary Policy Committee (which sets the Base Rate) show that two members voted for an increase (out of eight).

On the other hand the woeful GDP estimate showing a 0.5% contraction in the economy in the last quarter of 2010 pulled the MPC in the other direction, suggesting that the flailing economy needs as much support as it can get.

The truth is, no one knows what will happen to Base Rate, but most so-called experts think there will be a rise in the second half of 2011.

This means that now could be a great time to get into a fixed rate mortgage because you can bet that the minute rates go up, lenders will hike their fixed rate mortgages accordingly. That’s the way it works.

Fixed rates rising

The second reason many people are looking to fix now is because of concerns that fixed rates are already rising, regardless of the currently stable Base Rate.

The last few weeks alone have been described as a “rollercoaster in the mortgage market” by industry expert Ray Boulger.

He reckons that a massive 29 lenders have made changes to their products, with many changing their entire product range.

And, in case you are wondering, many of the changes have been increased fixed rates.

In other words, the best deals have already gone, but some competitive fixes still remain and the expectation is that they may not hang around for long.

Lenders are getting nervous about offering best buy fixed rates at the moment, as it attracts too much business and their service levels suffer. Plus many don’t have large amounts of cash to lend, so it gets used up pretty quickly if a deal is too good.

Considering that you can book a fixed rate mortgage for up to six months, as we explained in The sneaky mortgage trick to save you money, now could be the best time to bag a bargain before they rise again.

Below are some of my favourite current fixed rates:

Up to 90% of the property’s value

*Guarantor products, requiring a parent or helper to provide addition security on the loan

Up to 80% of the property’s value

Up to 70% of the property’s value

More: Find a competitive mortgage | How to buy a property at auction |The mortgage to kickstart the housing market

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This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.