The Rising Costs Of Fixing Your Mortgage

Mortgages and Home

Updated on 16 December 2008 | 0 Comments

Fixed rate mortgages are at their highest level for ten years...should that put you off?

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Summer is finally here and this week sees racing fans drinking Pimms and Champagne while gambling their money away at Ascot.

If you fancy a less glamorous way to gamble your hard-earned cash this summer why not remortgage your property, and try to make an educated guess on what sort of deal to take -- fixed or variable?

This is a controversial subject, but personally I still think that tracker rates are currently your best bet whichever way rates go. However, the vast majority of UK borrowers opt for a fixed rate. This proportion tends to increase in a rising interest rate environment, which we could find ourselves in this year, or not. Who knows?

What a shame then that fixed rates are at their highest level in 10 years, with two-year rates averaging 6.75%, according to Moneyfacts.

Last week, swap rates -- which determine the cost of fixed rate borrowing for lenders -- rose to a new high of 6.49%, meaning it will now cost lenders even more to secure fixed rate funds. The unfortunate news for borrowers means fixed rates will probably get even higher in the coming weeks.

Woolwich and Nationwide have already repriced their fixed rates upwards and more lenders are expected to follow their lead, widening the gap between fixed and variable/tracker rates even further.

In a fix with fees

Another problem is that many fixed rate mortgages are charging much higher fees these days. Lenders are taking no chances with borrowers. They want low-risk customers who can pay large fees to offset any risk that they will move on or fall into arrears.

What can you do?

Firstly, you can consider not taking out a fixed rate. Check out the total cost of deals, including fees, when working out what suits you. Discounted variable rates and tracker deals are looking more tempting than ever.

The average two-year variable rate stands at 6.66% - cheaper than fixed rates.

The most competitive variable products include two-year discounts from HSBC at 5.63% with a tiny £249 fee or a Woolwich fee-free deal at 5.74% for borrowers with 40% to put down upfront.

Secondly you could consider what is known as a drop-lock mortgage, which starts out on a variable rate with the option to move into a fixed deal at any time without penalty.

C&G currently offers a drop-lock deal -- its All Weather Mortgage. For those with a deposit of 25% or more, the rate 6.39% and the fee is £995 - not bad in these expensive times. If rates begin to rise you can switch to a fix for free.

Thirdly, you could fix for a longer period and forget about the credit crunch for a while. If you are going to pay a whopping great fee you can minimise its impact by having your rate secure for five years for example. Average five year fixed rates are currently 6.66%, 0.02% lower than two-year rates.

Finally, and if you still want a two-year fixed rate, look for the most competitive deals and get in there quickly. First Direct is currently offering a two-year fixed rate at 5.49% for borrowers with a 20% deposit or more, but it comes with a whopping arrangement fee of £1,498.

If you only have a 10% deposit HSBC is offering 6.29% fixed for two years with a fee of £799. Direct Line has a deal for borrowers who can only scrape together 5% to put down upfront, which comes with a low fee of £499 at a rate of 6.39%.

But remember, all of the most competitive fixed rate deals may be here today, gone tomorrow.

The Motley Fool Mortgage Service could help you find the best fixed rate deal for you

More mortgage tips:

  • Even if you want a fixed rate, consider other products and work out the true cost of the mortgage including arrangement fees.
  • Consider fixing for longer if you want to minimise the impact of a high arrangement fee
  • Shop around for the best fixed rates and if you see a good deal, move quickly. Lenders are currently repricing their fixed rates upwards.

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