Fix Your Rate This Week

Fixed-rate mortgages are set to go up soon. If you want to get a fixed-rate deal, move quickly!

You might think that last week's financial turmoil only affects customers of HBOS and Lloyds TSB, but it's already having an impact on the wider mortgage market.

Swap rates, which have a massive impact on fixed rate mortgage prices went up significantly and LIBOR (the rate at which banks lend to each other) rose enormously last week to 6%, its highest level since April.

What does this mean?

These rises mean that lenders have to pay more to borrow money and the increased cost will be passed on to the mortgage borrower. Already First National and Yorkshire Building Society have increased their fixed rates for those with just a 10% deposit.

The last couple of months have in fact seen the exact opposite of this happen, with swap rates decreasing and lenders passing on these cuts in the form of cheaper loans. 

Not a week went by over the summer without lenders launching new cheaper fixed rate deals, leading many to suggest that the best was yet to come and borrowers should hand on for further falls. The last six weeks has seen cuts of around half a percent on the best deals.

Now it looks like the current rates may actually be the best available for the foreseeable future and that this week and next will see a raft of increases, particularly on fixed-rate mortgages, reversing the recent cuts. 

Fix it now

If you want to fix your rate it might be worth checking out what's on offer and booking your rate now - deals can usually be held for three months. But if you do this check with your lender that you will be definitely entitled to the same rate even if its fixed rates go up in the meantime. This is also important for those borrowers who have already chosen a deal that has not yet gone through. Check with your lender the same rate will apply.

The following rates are currently available to borrowers with a 25% deposit or less, and are extremely competitive:

• First Direct's 4.99% two-year fixed rate available up to 80% loan to value (LTV) comes with an expensive but not outrageous fee of £1,998. And it's an offset mortgage!
• Yorkshire Building Society also offers a cheap two-year fix at 5.29% up to 75% LTV and it comes with a fee of £975.
• For those with a small deposit HSBC's two-year fix at 5.97% is available up to 90% LTV with a fee of just £799.
• For a longer fix, Newcastle Building Society offers a five-year fix at 5.6% with a fee of £1098. It's available up to 75% LTV.

Best of both worlds?

Another option is the 'drop-lock facility' offered by a number of high street lenders including C&G, Halifax, Nationwide and NatWest, as explained in a Fool article last week.

This enables you to take out one of their tracker deals (some products may be excluded) with the option of choosing to switch to any of their fixed rate deals without incurring the usual Early Repayment Charges. 

Of course, while this offers you the flexibility to benefit from rate falls or lock into the security of a fix, it also keeps you with the same lender, which may or may not offer competitive fixed rates at the time you want to move.

A better option in my opinion would be to go for an ERC-free lifetime tracker like HSBC's 5.79% remortgage deal with a fee of £599, which enables you to switch to any lender at any time without penalty and is available up to 90% LTV. The same deal is open to first-time buyers with a higher rate of 5.94% and a lower fee of £499.

Rates going down?

So you might think that I'm advising all Fools to take out fixed rate mortgages. But I'm not.

That's because there's a good chance that the Bank of England will cut its base rate at some point during the next 12 months. Yes, there are real inflationary pressures in the economy - and those are best combated by high interest rates - but we're also heading into recession, and the Bank may decide to cut the base rate to boost the economy.

If this happens, borrowers on a tracker mortgage will see an immediate benefit in lower payments. What's more, trackers are priced keenly and generally come with lower fees and charges than fixed rate mortgages. As a result, I prefer the tracker option in the current climate.

Standout deals include:

• Nationwide's three year tracker at 5.64% with a tiny fee of £299, and available up to 75% LTV.
• Woolwich has a term tracker at the same rate with a higher fee of £995 available to those with a 40% deposit.
• And for those with a small deposit the HSBC deal mentioned above is hard to beat at 90% LTV.

The Golden Rules

Here are three important points to conclude my article:

1. Nobody knows for sure what will happen to UK interest rates and mortgage rates. 

2. If you want total security of payment the best thing to do is fix your rate, as long as you accept that rates may fall and better deals may be available at a later stage. Or rates could rise and when your deal is up, you may face payment shock i.e a much higher rate.

3. If you want to benefit from the chance of rates falling, a tracker deal will offer you that option at a reasonable rate. But only take out a deal like this if you can afford the repayments now, and if rates were to rise by at least 1.5%.

More: Get A £1m Home For £25