Mortgage rates are going up again.
Only a fortnight ago, I wrote one of the first positive pieces about mortgages that I have written in a long while -- Getting In A Fix -- explaining that after an extremely tough couple of months for homeowners, there were signs that the landscape was changing. Short-term mortgage rates were falling!
However that reprieve, it seems, was short-lived, as the recent turmoil in the financial markets has prompted lenders to hike rates upwards once again. This has quashed the earlier shoots of optimism, and spells bad news for the tens of thousands of borrowers coming to the end of cheap deals who had been delaying remortgaging in the hope that mortgage rates would get cheaper.
Recent Rate Reductions
Earlier in the month, a host of lenders, including Abbey, Halifax, HSBC, First Direct, Lloyds TSB and Nationwide had all cut rates on new deals, with short-term fixes returning to levels not seen since the start of the credit crunch.
But since then, we have seen the bailout of insurer AIG, the collapse of US investment bank Lehman Brothers, and the rescue of Halifax Bank of Scotland by Lloyds TSB.
These shocks have made banks reluctant to lend to each other and pushed up the cost of borrowing in the money markets, which dictates the future movement of mortgage rates.
As a result, the downward trend in rates has been rapidly reversed.
How Have Lenders Responded?
Last week, Libor -- the interest rate that banks pay to borrow from each other -- jumped back to over 6 per cent on the back of the recent turbulence. At the same time, swap rates, which dictate the cost of fixed-rate mortgages, have also moved upwards.
As the cost of wholesale borrowing has jumped, lenders have wasted little time in making a U-turn on their recent cuts, and have begun to increase rates to reflect this.
Yorkshire building society was first off the starting blocks, with the announcement it was re-pricing some of its higher loan-to-value (LTV) fixed rates upwards, as well as withdrawing some of its five-year fixes.
Elsewhere, HSBC, First Direct and the Woolwich also reacted quickly and edged rates upwards by more than a quarter point.
More are expected to follow suit in the next few days -- announcing not only higher interest rates but also tighter lending requirements.
So What Should Borrowers Do Now?
While many borrowers had been holding out for better rates, the advice now is to act -- and to act fast.
The good news is, with many lenders, you can reserve a mortgage rate for up to six months before you need it, and it's certainly worth getting things in place a good while before your current deal runs out, to avoid any administrative delays.
What's more, if you hold out until the last minute, you risk slipping on to your lender's standard variable rate (SVR).
And, given that the average SVR currently stands at more than 7 per cent, this could mean a large increase in payments for the months you spend on this rate. As if this weren't bad enough, you may also find that you end up languishing on the SVR for longer than expected. That's because you might find it harder to find a better deal if your credit record is anything less than impeccable.
To Fix Or Not To Fix
If you're coming to the end of a cheap fix, you may be confused as to what to do next, with mortgage rates yo-yoing so much at the moment.
If you want the security and peace of mind offered by a fix, First Direct has a two-year deal at 5.19 per cent with a £1,998 fee up to 80 per cent LTV, and Britannia has a two-year deal at 5.34 per cent with a £999 fee, up to 60 per cent LTV.
But given the widespread expectation that Bank rate will fall by at least 1 per cent to prevent the economy from falling into a recession, now could be the time to consider a tracker mortgage where repayments fall in line with the Bank of England's base rate -- provided you would still be able to afford your repayments should the base rate go up.
Lloyds TSB currently has a two-year deal at 5.79 per cent up to 80 per cent LTV with a £794 fee, and Britannia has a two-year tracker at 5.79 per cent up to 60 per cent LTV or at 5.99 per cent up to 80 per cent LTV; both come with a £499 fee.
If you're torn between a fix and a tracker, one further option is to go for a deal with a "drop-lock" option, as this gives you the best of both worlds. With this type of deal, you can play a waiting game, benefiting from any fall in interest rates -- but can then switch to a fixed rate when you feel the time is right.
Nationwide, for example, has a tracker deal at 5.53 per cent for two years for remortgagers with a £1,999 arrangement fee, offering the facility to lock into a fix if rates start to rise.
Start looking now!
More: Fix Your Rate This Week