These cheap mortgages won't be around for long

Mortgage rates are still extremely low. But they may not stay that way for long. Robert Powell looks at why prices could be set to rise and rounds up the latest top deals...

The ‘tentacles of the European Union’ are ‘salami slicing our sovereignty’.

These were just two of the somewhat barmy metaphors delivered by MPs earlier this week during the EU referendum debate.

But one equation – made by David Cameron – may indeed turn out to be very prescient. Although perhaps not in the way the Prime Minister had primarily intended.

Fire from the Eurozone

Europe is on fire. Well, it is according to the PM. And that fire is threatening to spread to our house.

Now, of course there is no Europe-wide fire, just a financial crisis. But that doesn’t mean that the troubles across the Channel won’t damage our homes.

Mortgage market made of paper

If the Eurozone crisis is a fire, then our mortgage market is made of paper.

By that I mean that rates have reached something of an abnormally cheap sweet spot. In fact, it’s a 23-year low sweet spot. This means that, at some point, they are only going to head one way.

And financial woes on the continent could cause our cheap rates to go up in smoke.

Up in smoke

Mortgage prices, especially on fixed products, are dependent on swap rates. These swap rates are basically determined by the international money markets and dictate how much it costs for a lender to fund your mortgage. If their costs go up, so do yours.

The Base Rate has some influence on these rates, but it doesn’t fully determine them.

Indeed, according to the latest Bank of England Trends in Lending publication, five-year swap rates – a key determinant of five-year fix prices – have picked up sharply since July. That’s despite the Base Rate remaining at 0.5%.

Why? The fire across the channel, that’s why.

Fanning the flames

The flames of the Eurozone crisis are being fanned onto us thanks to the exposure of certain Euro-area banks and countries to credit risk. Put simply there are a lot of people, with not a lot of money, who have a lot of debt.

As a result, lenders expecting cash back from these skint banks and countries are very reluctant to dish out any more money. This is pushing up the cost of borrowing.

But the flames haven’t quite reached the front doors of normal Brits yet.

Do you smell burning?

The Bank of England publication reports that UK lenders are seeing high wholesale costs feed through internally. But, as yet, the impact on household loans is muted.

However the fire won’t be contained forever.

The report also forecasts that mortgage rates will rise in the coming months, if the international wholesale markets do not improve.

Basically, if the Eurozone can’t put out the flames, they could be here soon.

So what to do?

Shut the fire doors!

Well, one option is to shut the fire doors and lock into a fixed mortgage while rates are still low. This will guarantee your mortgage price for a set term, and hence protect you from mortgage market price increases and Base Rate rises.

Here are nine of the best fixed mortgages around at the moment:

Now, I know what you’re thinking: that 1.99% two-year fix is looking good. Well, yes it certainly is. But that doesn’t mean it’ll keep the flames out for the long-term. Read A two-year mortgage will break your heart to find out why.

Personally, I’d snap up a sturdy but cheap five-year fix and shield yourself from the heat of price rises for the long-run.

Or alternatively you could follow the flames...

Follow the flames

Variable mortgages that follow the Bank of England Base Rate are still ludicrously cheap.

Take a look at these nine deals:

Again, the two and three-year deals may be catching your eye. But they’ll only offer you limited protection from the heat. And when they do eventually burn down, you’ll be exposed to a fired up mortgage market full of pricey rates.

A discounted mortgage may not even last that long, as you’ll be completely at the mercy of the lender. And if the heat from the Eurozone starts to singe them, you can expect price rises before your set term is up.

All aboard!

Jumping on a lifetime tracker could prove a far safer option. If you are completely determined to follow the tiny base rate, that is.

These deals will allow you to jump ship at any point and head for safer, fixed rate climbs.

HSBC has a particularly strong range of lifetime mortgages. Most of which have very low fee levels.

But remember, when the Base Rate does eventually rise – so will your rate. So make sure you budget in repayments for a monthly mortgage charge that is at least two percentage points above your initial rate.

Gone up in flames

Whatever you do, you’ll need to act fast to get hold of these deals. A few months down the line, they could have all gone up in flames.

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