Pssst! Some Mortgages Are Getting Cheaper

A few lenders have trimmed the cost of their fixed-rate loans in the last couple of weeks. Could mortgage rates be on the turn?

All year we've been hearing gloomy warnings of higher mortgage rates. And then there's the `payment shock' people face when their existing fixed-rate deals expire and their mortgages revert to more expensive standard rates.

Fixed-rate cuts

But here's good mortgage news for a change. In the last couple of weeks, a few lenders such as Abbey, Coventry and, most recently, Nationwide have decreased their fixed-rate and tracker deals. The reductions have been small, of the order of 0.1% or 0.2%, but worthy of note nonetheless.

The cuts are due to a knock-on effect from the recent stock market turmoil, as the rates lenders use to fund their mortgage business have gotten a little cheaper.

Some lenders are sitting on the sidelines though, waiting to see how the current situation with the US sub-prime market plays out. They could be waiting for some time I suspect! And borrowers with past credit problems are finding the rates being offered to them are rising, with lenders becoming (belatedly) more selective about who they lend to.

So it's a mixed picture, as is often the case. There are still attractive deals out there in my opinion, although the usual caveats apply with respect the very lowest rate deals often having unattractive arrangement fees.

Payment shock or not?

I'm probably in a minority of one, but I feel that much of the pessimism surrounding payment shock has been overdone.

The Council of Mortgage Lenders provides data on what the average fixed rate taken out was on a month by month basis. The most popular fixes tend to be two and five years, so if we look back we can see what sort of rates people were getting two and five years ago this month, and compare them to what's currently available.

Two years ago, almost three-quarters of people were taking out a fixed rate, at an average rate of just over 5%. Look back five years and the average fixed rate was pretty similar, at 5.2%, but then only one in five people were opting for a fixed rate.

This June is the latest month for which data is available, and then the average fixed rate was 5.6%. To me, this doesn't seem like a massive increase.

Of course, it's true that the average fixed rate has probably risen a little more since June and arrangement fees are a lot higher than they were a few years ago. I'm also presuming that people coming out of fixed-rate deals are looking for a new loan, as any sensible Fool would do, rather than sticking with the one they've got.

Even given these reservations, we're probably talking about an increase of one percentage point in the average fixed rate mortgage. Over two years, I wouldn't regard this as a particularly big movement. Over five years, I reckon it's pretty small. So, yes, there will be payment shock for some but nothing that can really be considered to be out of the ordinary.

Remortgaging now

The key decision many people agonise over is whether to get a fixed rate or a tracker. It looks like 2007 could be a record year for fixed-rate mortgages, with 76% of people opting for them in the first six months of this year. That's significantly ahead of the average percentage of fixed rates taken out since 1993, which is 41%. Being a bit of a contrarian, I tempted to think this means it could be a good time to look for tracker mortgages!

Much more important than speculating where interest rates might go in future though is to consider how much slack there is in your household budget. If you'd struggle to cope with any further interest rate rises, then a fixed rate mortgage is definitely the way to go.

Whatever you decide, our mortgage service can help you find the right deal. It's free to use and we may be able to get you a deal with a better rate than you can get direct from a lender. 

More: Fix Your Mortgage Rate for Life