Are Fixed Rates The Way Forward?

Fixed-rate mortgages are set to come down, and trackers are on the up. Is it time to lock in?

For much of this year fixed-rate mortgages have looked expensive in relation to trackers, and I have been banging on about how great trackers are in terms of immediate cost and possible future savings.

For once I have been proved right - by accident rather than design - as the financial crisis spiralled further out of control than anyone could have imagined and global interest rates have begun to slide.

Those who got into a tracker mortgage before October are already benefitting from a 0.5% reduction in rate and may well see that drop by another 0.5% or more tomorrow as another rate cut looks likely.

But those who fixed at 6.5% in the summer may well feel they are paying over the odds now we have a base rate of 4.5%.

But while fixes have looked uncompetitive compared to trackers during 2008 (especially when you look at total cost), that could all be about to change.

Tracking up

As the base rate looks set to fall by at least 0.5% on Thursday and possibly further in the coming months, lenders are repricing their tracker deals upwards to maintain their margins. In other words, a lender might raise the rate on its new tracker deals from, say, Base Rate +1.2% to, say, Base Rate +1.5%.

That's despite Government calls for rate reductions to be passed on to borrowers. The lenders are pre-empting the fall by putting their rates up now.

Base Rate doesn't reflect lenders' actual cost of variable money. The London Inter Bank Offered Rate (Libor) is a better reflection of what it costs lenders to borrow and it is stubbornly high in relation to Base Rate at the moment.

So if the base rate is reduced by 0.5%, it doesn't mean the cost to the lender has fallen by the same amount. That's why the lenders are taking action now. In the last few days Abbey and Nationwide have increased their tracker rates -- Nationwide by up to 0.4%, Abbey by up to 0.5%.

Fixed falling

But both of those lenders have also cut their fixed rates in the last week, as did Alliance & Leicester, in response to falling swap rates (which largely determine the cost of fixed-rate money to lenders).

A&L has cut all of its fixed rates deals for customers seeking up to 75% loan-to-value (LTV) and Nationwide has cut fixed rates by up to 0.49%.

Abbey is also cutting. The banks now has an attractive range of fixed-rate deals for those with equity:

• Two and three-year 60% LTV (loan-to-value) deals are 5.49% with a £499 fee
• Two-year fixed rate deals at 75% LTV now start from 5.54% with a £995 fee
• And a new five-year fix at 60% LTV has been launched -- 5.49% with a £499 fee.

For those seeking certainty (and with 25% equity) fixed rates are looking attractive again.

What next?

Assuming a base rate cut on Thursday, those already on trackers will benefit from an immediate reduction. Those on SVR and discounted rates will have to wait and see if their lender passes on the full cut. Only half of lenders passed on the last cut and it is likely that many will not be able, or willing, to pass on another reduction.

But there is some good news. Despite LIBOR and swap rates being out of kilter with Base Rate all year, SWAPs are steadily reducing, and have dropped by around 0.6% in the last month -- an encouraging sign for fixed rates in particular. LIBOR has also reduced significantly over the last week.

We have already seen some lenders cut their fixed rates and it is likely we will see further reductions in the coming weeks, although it should be remember that the best rates still come with extremely high fees and are usually only available at very low LTVs.

Not everyone agrees with this prediction. Some say that pricing will not follow Base Rate downwards for some time until LIBOR shifts further down too, which may take some months. As has been the case all year, nobody knows, so you can only go for what best suits your own circumstances.

If you do not need to remortgage right away, waiting could be a good option for those want to fix.

But if you have to switch now, look at Northern Rock's 5.35% two-year fix with a £1,995 fee (up to 75%),West Brom's 5.59% five-year fix up to 75% LTV with a £999 fee, or check out Abbey's new fixed rates mentioned above.

If you want a tracker, it might be worth looking at some of the competitive deals around that haven't yet gone up - such as First Direct's market-leading 5.49% term tracker. It's got a tiny fee of just £399 and, even better, is available up to 90% LTV.

It is likely that as the base rate goes down, lenders will be forced to continue to reprice trackers upwards, at least for the foreseeable future. So move quickly to bag a good tracker and benefit from falling rates.

More: Ten Top Mortgage Deals