Hedge Your Home Loan

With interest rates expected to rise this year and then fall in 2008, do 'fix and track' mortgages offer the best of both worlds?

As you're probably aware, the Monetary Policy Committee of the Bank of England voted on Thursday to leave the base rate unchanged at 5.50% a year. This decision was widely predicted by economic forecasters and financial pundits. However, current expectations are that borrowers should brace themselves for another quarter-point (0.25%) rise, possibly as early as next month.

Then again, although acres of newsprint are dedicated to pundits' predictions for future interest rates, history suggests that this may well be a mug's game. After all, the world economy is so huge, and the interactions between financial systems so intricate, that complex mathematical models are liable to produce results no better than guesswork. As Nobel Prize-winning physicist Niels Bohr is said to have remarked, "Prediction is very difficult, especially of the future."

Anyway, the point I'm making is that the future is always unclear, so it's important to take steps to manage this uncertainty. One way for homeowners to do this is by taking out fixed-rate mortgages, which enable them to budget for predetermined monthly mortgage repayments over, say, two, three, five, even twenty-five years.

Indeed, according to the Council of Mortgage Lenders, in the first quarter of 2007, three-quarters (75%) of borrowers opted for fixed-rate mortgages (374,300 out of a total of 499,300). Clearly, this suggests that many borrowers are worried about the direction of future interest rates and, therefore, prefer the security that fixed rates offer.

On the other hand, what if, for example, you believe interest rates will rise over the next twelve months before falling back next year once the Bank of England has inflation (rising prices) under control? In this scenario, you may wish to hedge your bets (and take advantage of any rate reductions) by opting for a hybrid mortgage, such as a 'fix and track' deal.

For example, the Woolwich (a former building society which is now part of Barclays) offers borrowers a fix at 5.39% until 30 September 2008, which then reverts to a lifetime tracker rate of base rate plus 0.39% (currently 5.89%). This 'drop lock' deal comes with an application fee of £595, but there is no redemption penalty for switching to another Woolwich fixed or capped rate between 1 October 2008 and 30 September 2010.

Another lender, Skipton BS, has gone even further: its new mortgage range allows borrowers to 'mix and match' from a selection of fixed and capped rates along with discount and tracker mortgages.

This enables borrowers to tailor their mortgage rates in order to suit their personal financial requirements -- and their expectations as to future rate hikes and cuts. In effect, Skipton BS allows its borrowers to create their own personal mortgage portfolios to ride out both higher and lower rates.

So, if you want to speculate on future base-rate moves, protect your monthly repayments over the short- or long-term, or enjoy some security but still benefit from rate reductions to come, then these innovative mortgages will allow you to hedge your bets. Who knows, if you play your cards right, then you could come away a winner!

By the way, speaking of future rate expectations, according to financial researcher Moneyfacts, many lenders are withdrawing fixed-rate mortgages to replace them with new deals at higher rates. In the past week, we've seen:

• Bank of Ireland pull all prime fixed rates;
• Birmingham Midshires withdraw all fixed rates for 130% loans;
• Dudley BS pull all five-year fixed rates;
• Halifax increase fixed rates by 0.30%;
• Northern Rock hike rates by 0.10%; and
• Portman BS pull all no-deposit (100% LTV) fixed-rate mortgages.

Clearly, the trend is for lenders to pull out and reprice before relaunching their fixed-rate mortgages. Then again, Birmingham Midshires and Portman BS have followed HSBC's lead by pulling out of the riskier end of the market.

Obviously, lenders are becoming increasingly nervous about lending to buyers with no deposit and those who want to borrow more than the value of their home (often in order to roll-up unsecured debts). If this cautious approach to lending continues, it could put a damper on the property market, so watch this space.

> For magnificent mortgages, check out our award-winning, no-fee mortgage service!
> How High Could Mortgage Rates Go?
> Malevolent Mortgages Under Attack