Now's the time to get a fixed rate mortgage

As lenders hike their standard variable rates, the time is ripe to grab a low fixed rate mortgage while you can.

For the last three years the Bank of England base rate has been at an all-time low of 0.5% - and it’s still there. The biggest consequence for most of us has been that both savings rates and mortgage rates have reduced dramatically.

In fact, mortgage rates dropped so much that the remortgaging market fell off a cliff edge. After all, why bother switching when you will automatically revert to your lender’s super low standard variable rate (SVR), or a cheap long-term tracker?

Apathy became the name of the mortgage game.

And with base rate looking set to remain at 0.5% for the next year or more, this didn’t look like changing any time soon. That was until two of the country’s biggest lenders well and truly upset the applecart last week, and made borrowers up and down the country think twice about their mortgage.

The SVR hike

The Royal Bank of Scotland (RBS) and Halifax made front page news last week when they hiked their SVRs.

RBS announced it would increase its variable rate by a quarter of a percent to 4%, affecting 200,000 borrowers.

And Halifax will increase its SVR from 3.49% to 3.99% from 1st May, affecting 850,000 of its customers.

The total impact of both of these moves is that over one million borrowers are about to see an increase in their monthly repayments. For the majority – the Halifax borrowers – that increase will be around £24 per month on a £100,000 mortgage, and significantly more for those who have borrowed big.

Interest-only borrowers will be hit harder by the hike, with monthly repayments on a £100,000 loan rising by just over £40 a month.

Bank of Ireland has announced it was increasing its SVR for Bank of Ireland and Bristol & West residential mortgage customers from 2.99% to 3.99% in June and then to 4.49% in September.

And now Clydesdale and Yorkshire Banks have announced that their SVRs are going up from 4.59% to 4.95% from 1st May.

All these mortgage moves raise two very important questions for all borrowers on their lender’s reversionary rate. Firstly, will other mortgage lenders follow suit and hike their SVRs, and secondly, is now the time to jump to the safety of a fixed rate deal?

Fear of contagion

With two huge lenders hiking their rates, borrowers currently on their own lender’s SVR are understandably a little concerned that they might do the same thing.

But it isn’t all bad news.

Firstly, many lenders’ SVRs are already the same or higher than the new rates announced by RBS and Halifax last week. So in fact they were merely bringing their own previously cheaper SVRs in line with the rest of the market. Of course, it still sticks in the craw, since they were both bailed out by the taxpayer!

But it does mean that other large lenders won’t need to hike their rates to match Halifax and RBS, since they are already at the same level.

Secondly, of the few larger lenders that do still have a lower SVR, some have guarantees written into their mortgage contracts that do not allow them to raise it beyond a certain level above base rate. So their borrowers are safe.

For example, some Cheltenham & Gloucester, Lloyds TSB and Nationwide borrowers (those who have been with them for over three years) pay a tiny 2.5% SVR and this is guaranteed to stay within two percentage points of Base Rate. In other words it is already at its maximum level unless base rate rises.

Newer borrowers of all three of those lenders are on a more expensive rate of 3.99%, already in line with the new, higher SVRs announced last week.

This means that there is unlikely to be widespread contagion of SVR hikes in the current market, unless base rate rises.

But let’s be realistic, some lenders could follow the lead of Halifax and RBS for the same reasons they raised their rates – because their own funding costs have increased over the last few years.

Seek the shelter of a fix

If you are one of the million plus customers affected by the rises you are probably working out the best thing to do now.

If you have plenty of equity you have many options because you can easily remortgage to a much better rate than the 3.99% or 4% SVR you will end up on.

Halifax borrowers also have the option of staying with the lender and moving to a fee-free fixed rate mortgage if they are not happy on the higher SVR (why would they be?).

Those with 25% equity can take a 3.74% two-year fix while borrowers with 40% equity can take a two-year fix at 3.49%.

Neither of these deals are market leading. In fact, they can be roundly beaten, even when you take into account arrangement fees for moving to a new lender (see below for the best fixed rates).

What about other borrowers?

Borrowers with Halifax and RBS have the catalyst they need to remortgage now, but what about everyone else?

If you are on an SVR you simply don’t know if your lender will increase your rate in the near future, or not. There could be a hiatus before another round of rate rises.

But what is guaranteed is that with every increase in variable rates, more borrowers will get the jitters and think about fixing their mortgage. And of course, lenders will look again at their fixed rate pricing.

Fixed rates are currently at extremely low levels but they won’t stay that way and, for borrowers who really can’t afford an increase in repayments, switching to a fixed rate now could be the answer. Those with plenty of equity will be able to find some very attractive deals.

Unfortunately those borrowers without much equity in their homes have fewer choices. If you only have 10% or 15% equity for example it is still worth shopping around to see if you can beat your current rate with a fix, or indeed a tracker if you prefer. But you may find that once you take into account arrangement fees, switching doesn’t look so appealing.

Below are some of the best fixed rates available now:

25 fab fixes

More: How to beat Stamp Duty | Halifax: house prices falling

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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