Fixed rates are the most popular type of mortgage with UK borrowers, and they are getting cheaper.
There has been a lot of talk in the press about how mortgages are getting cheaper following the Bank of England’s base rate cuts. Existing borrowers on tracker mortgages in particular have benefitted from falling monthly mortgage repayments of, on average, £150 a month, since October.
All well and good, but only 28% of borrowers took a tracker deal in quarter three of this year, and it is fixed rates that are the mortgage of choice for 60% of borrowers, according to the Council of Mortgage Lenders.
Why is this?
Firstly, fixing is the only way to guarantee your mortgage payment will stay the same over a period of time. If you fix for two years your repayment will not change for two years, and that offers a massive benefit to many borrowers, in particular first-time buyers. If you are borrowing a large amount of money on your mortgage you may not have the financial capacity to pay more, and being able to budget is essential.
Despite the fact that we are in a falling interest rate environment at the moment -- and for the foreseeable future -- there are no guarantees that rates will stay low, especially when you try to forecast over a period of two to five years.
In other words, don’t bank on the base rate staying where it is. If you cannot afford for your monthly repayment to increase, you should really consider going for a fixed rate mortgage.
Low deposit
Another reason borrowers are fixing is because many have no choice. If you are a first-time buyer with a small deposit and need to borrow at a high loan-to value (LTV) ratio, fixing could be your only option. Tracker rates for first-time buyers generally demand a 25% deposit, with a handful of deals available to those with at least 20%. This level of deposit is simply unachievable for many aspiring homeowners. Fixed rates however, are still available to first-time buyers up to 95% LTV.
Falling rates
Although new fixed rates have been slow to change in price in relation to the base rate (and actually in relation to swap rates too, which reflect the lenders’ cost of borrowing fixed term money), they are falling now.
The last few weeks have seen a number of lenders reprice their fixed rate mortgages downwards and while, deals are not exactly cheap when you consider we have a 2% base rate, fixed rates are in fact cheaper than they have been for the last few years.
Recent research shows that the current best buy two-year fixed rates are around 4.29%, with the best three-year deals starting at 4.69% (this doesn’t include extremely high fee deals with low headline rates).
A year ago in December 2007, borrowers were forking out over 6% for the best fixed rate mortgages, while the best two-year rates in January 2007 and 2006 were between 4.5% and 5%. In other words, today’s rates are lower -- and so they should be.
Of course, lower LTV borrowers still benefit from the cheapest deals and rates for those borrowing at 90% plus are still pretty high.
But what are the best deals depending on your deposit?
Large deposit – LTV up to 60%
The headline rate at this LTV tier is 3.99% for a two-year fixed rate from Alliance & Leicester (A&L). However it comes with a 1% fee that will be suitable for some borrowers but prohibitive for many. The best of the rest are:
| Lender | Length of deal | Rate % | Maximum LTV | Fee |
|---|---|---|---|---|
| Abbey | 2 years | 4.29%* | 60% | £995 |
| NatWest/RBS | 2 years | 4.59% | 60% | £799 |
| Abbey | 5 years | 4.94%* | 60% | £995 |
| Nationwide | 2 years | 4.98% | 60% | £599 |
*remortgagors only
Medium-sized deposit – LTV of 61% to 80%
There are plenty of lenders offering fixed rate mortgages in this lending tier with some good deals available. Again A&L offers a low headline rate of 4.49% on a two-year fix up to 75% but with a 1% fee. It can be matched on rate by Principality Building Society, which goes one better with a small fee of £499.
The best of the rest are:
| Lender | Length of deal | Rate % | Maximum LTV | Fee |
|---|---|---|---|---|
| A&L | 2 years | 4.99% | 75% | Fee free |
| Market Harborough | 2 years | 4.65% | 75% | £595 |
| Abbey | 2 years | 4.54% | 75% | £995 (£250 cashback on completion) |
| Bank of Ireland | 5 years | 5.29% | 80% | £999 |
Small deposit – LTV of 81% upwards
One of the lowest rates available at this level is from Hanley Economic Building Society at 5.29% for a two-year fixed rate mortgage up to 85% LTV. The product comes with a fee of £849.
The best of the rest are:
| Lender | Length of deal | Rate % | Maximum LTV | Fee |
|---|---|---|---|---|
| C&G | 2 years | 6.19% | 90% | Fee Free |
| Bank of Ireland | 3 years | 6.35%* | 95% | £799 |
| Yorkshire BS | 2 years | 5.79% | 85% | £195 |
| Bristol & West | 3 years | 6.39%* | 95% | £499 |
*With these deals the borrower needs parents to stand as guarantors on the mortgage.