Rate rises will hit 90% of borrowers

Mortgages and Home

John Fitzsimons
Updated on 29 March 2011 | 6 Comments

According to one firm, nine in every ten borrowers are vulnerable to base rate rises.

With base rate so low over the last few years, it’s no great surprise that variable rate mortgages have been so popular. After all, the initial rates are so much lower than on fixed rate mortgage deals.

However, by going for a variable mortgage you leave yourself vulnerable to future fluctuations in base rate. And according to one mortgage firm, an awful lot of borrowers find themselves in this position today.

Legal & General Investment Management reckons around 90% of active mortgages in the UK are on a variable rate.

This is far higher than figures from other sources, including the Financial Services Authority, which most recently suggested 68% of borrowers were on variable deals. L&G reckons that everyone else has underestimated this figure, as they have failed to take into account the number of borrowers who move onto variable rates once their fixed period ends.

And if they’re right, that’s an awful lot of borrowers who have some repayment pain on the way.

Not if but when

This is because base rate will start to rise soon. While bank base rate has sat at its current record low of 0.5% for two years, for much of that time there has been no indication that it would start to rise anytime soon.

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That’s no longer the case. For a while, Andrew Sentence was the lone voice on the Monetary Policy Committee (the body that sets base rate) arguing for a rise, but he has since been joined by two other members. With inflation rocketing to double the committee’s target, experts expect at least a couple of rate rises this year, with one likely as early as May.

The attraction of variable rates

The last few years have shown just why many borrowers are attracted to variable mortgages, with thousands of borrowers seeing their monthly mortgage repayments slashed.

Indeed, the rates on offer to new borrowers have also been pretty sensational, with deals available offering an initial rate of interest of less than 2%! It’s understandable borrowers would want to Forget fixes and turn to trackers.

And such low rates present borrowers with a real opportunity. Sure, they can enjoy the low repayments and splash the rest on nice holidays and iPads, but if they are sensible and instead overpay on their mortgage, they can slash years off their mortgage, saving thousands in interest payments as a result. Indeed, just overpaying for a couple of years can allow you to build up your equity stake in the property far quicker, so that when the time comes to remortgage, you can borrow at a lower loan-to-value, therefore nabbing a more attractive rate!

The safety of a fixed rate

John Fitzsimons explains why the best mortgages offer you a bit of flexibility

However, once rates start to move upwards, and those mortgage repayments get larger, things may get a little tight for those borrowers on trackers. That’s why now is such a sensible time to nab a fixed rate, and a long-term fixed rate at that.

The rates on offer at the moment are historically really low, and are only going to start rising in the coming months. And while ten-year fixed rates have all but disappeared, there are still plenty of attractive fixed rate deals that offer a great haven for borrowers concerned about the prospect of rising rates. I’ve put together 20 of my favourites in the table below.

20 tremendous fixed rates

Lender	Term	Interest rate	Maximum loan-to-value	Fee
Yorkshire BS	Two-year fixed	2.99%	75%	£1,995
Halifax	Two-year fixed	3.15%	60%	£995
Skipton BS	Two-year fixed	3.49%	70%	£995
ING Direct	Two-year fixed	3.89%	80%	£945
Norwich & Peterborough	Two-year fixed	3.99%	85%	£995
Post Office	Two-year fixed	4.29%	85%	£995
Halifax	Three-year fixed	3.75%	60%	£995
Nationwide BS	Three-year fixed	3.99%	70%	£900
Yorkshire BS	Three-year fixed	4.19%	75%	£995
Market Harborough BS	Three-year fixed	4.30%	80%	£495
Vernon BS	Three-year fixed	4.35%	80%	£495
Yorkshire BS	Three-year fixed	4.99%	85%	£995
Woolwich	Four-year fixed	4.49%	70%	£999
Santander	Four-year fixed	4.79%	70%	£995
Principality BS	Four-year fixed	4.89%	75%	£0
Santander	Four-year fixed	5.69%	85%	£495
Nationwide BS	Five-year fixed	4.39%	70%	£900
Yorkshire BS	Five-year fixed	4.69%	75%	£995
Vernon BS	Five-year fixed	4.99%	80%	£495
Nottingham BS	Five-year fixed	5.19%	85%	£995

The safest tracker around

However, there is one type of tracker mortgage that I’m a huge fan of, and which offers you a little more protection when it comes to rising rates than traditional trackers. I’m talking about the term tracker mortgage (also known as a lifetime tracker).

10 great term trackers

Lender	Term	Interest rate	Maximum loan-to-value	Fee
HSBC	Term tracker	2.29% (base rate + 1.79%)	60%	£99
First Direct	Term tracker	2.49% (base rate + 1.99%)	65%	£199
Bank of China	Term tracker	2.80% (base rate + 2.30%)	75%	Between £1,295 and 0.5% of loan advance
ING Direct	Term tracker	2.80% (base rate + 2.30%)	75%	£945
HSBC	Term tracker	2.89% (base rate + 2.39%)	80%	£599
Saffron BS	Term tracker	2.98% (base rate + 2.48%)	75%	£999
Woolwich	Term tracker	2.99% (base rate + 2.49%)	70%	£999
Woolwich	Term tracker	3.38% (base rate + 2.88%)	80%	£999
Market Harborough BS	Term tracker	3.45% (base rate + 2.95%)	80%	£495
ING Direct	Term tracker	3.74% (base rate + 3.24%)	80%	£945

More: What to do with your child’s savings | Five reasons why ISAs are better than pensions

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

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.

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Comments

Humuyan
29 March 2011
This is an informative article and could well have an impact on the UK recovery and even worse a return to the repossessions of early nineties when Mr Lamont allowed the interest rates to 15%, although these rates I doubt will ever see again.
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petitemisschief
28 March 2011
Lovemoney been trying to talk up the interst rate for months and sell us fixed rates. I'm sticking with Nationwide which is 2% above base rate till the end of my mortgage unless I choose to switch. Why pay more for a fixed rate now whenyou can be paying the same amount off the capital and thus reducing the debt for when the rime is right to switch. I don't think rates will rise to the level of most fixed rates for a long time yet. We may see a tentative quarter or half percent but not much more. Go with your own instinct - not with anyone who advertises products on their site
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gr8it
28 March 2011
Thanks for the heads up on the interest rate rise thats coming 'soon'. Glad to know that we have inside information! The fact is this is just another media frenzy of trying to call the upward movement on interest rates. You've got it wrong for 2 years but you keep chipping away. We can all predict that 'one day' interest rates will increase, and for many, the variable rate mortgage, for at least another year or two, is going to still be cheaper unless of course interest rates go up by more than the odd 1/4 %. You dont know what is going to happen, so to say as a matter of fact that this will happen 'soon' is scaremongering for the sake of it. The headline is again just pushing the boundaries of pathetic journalism to its limit. The plain fact is, that the BOE have very little choice at the moment because our economy is still very fragile, interest rates are used ,or at least have been in the past, to stem consumer driven inflation, which we dont have and probably wont have for at least another 2 years in my view. So the long and short of any interest rate rise is that it will only serve to appease Andrew Sentence who has been screaming for a rate rise for at least a year. Perhaps you would like to enlighten the general public as to what massive benefits we would have seen in the economy if the BOE had listened to the guy a year ago. Would the economy have pulled itself back into the black? Would we all have more money in our pockets to support the economy? The answer is, its a useless tool (pardon the pun) in the current financial climate. My view on the budget is that to give families an extra £45 a year when the economy is in such trouble, and we owe billions, is rather pathetic. They didnt need to do this, they should have put the money to reduce the deficit, and save us all money in the future. £45 per household is £100m or more, and none of us will even recognise this is in our pockets. Cancelling the 3p per litre petrol rise, another empty gesture, petrol prices have gone up 30% in the last 12 months, thats 30p a litre, and the treasury gets 20% of that in extra VAT, so they are already getting an extra 6p in revenue per litre from that increase. I voted these guys in and wouldnt want Labour in any event, but I've seen no substance from the coalition that makes sense. They are certainly not helping the economy back to a point where the BOE can even consider a rate rise. What is very apparent though, from all this is that, alarmingly, I cannot see how the economy could survive an increase in rates now. With people on variable rates, and struggling with mortgage rates of 3%, a half point increase will cause the actual % increase in outgoings to go up by about 17%. In other words for every £100 they pay now, they will have to pay £117 on their mortgage. Not really a problem for those of us who remember the heady days of the 18% mortgage perhaps, but we now have a generation of home owners who can only afford housing at its current value 'because' rates are so low. Any increase will cripple these first time buyers and the bottom end of the market will collapse again. They've done the right thing to keep rates low, but they havent done enough to fix the economy.
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