Fixed-rate mortgage price war as threat of rate rise recedes
The minutes from the August meeting of the Monetary Policy Committee suggest that interest rates, despite sticking at 0.5 per cent for an incredible 30 months, are unlikely to rise anytime soon. For the first time since May last year, all nine members were unanimous in voting for no movement in base rate. The global downturn, slow UK economic growth and expectations that inflation will fall in the medium term, make it increasingly likely that interest rates will not rise until well into next year.
Meanwhile, lenders are busy slashing the pricing of their fixed-rate mortgages. Falling money market rates and a danger of lenders missing end-of-year lending targets, is resulting in some of the cheapest fixed-rate mortgages, ever. There are now several five-year fixes available at less than 4 per cent, for those with significant equity – 25 to 35 per cent – in their homes, or similar level of deposit. Coventry Building Society is the latest lender to join the ranks of sub-4 per cent five-year fixes, launching a five-year deal via brokers pegged at 3.49 per cent (4.3 per cent APR) for those with a 35 per cent deposit and £999 fee. For those who would pay a lower fee, there is a slightly higher rate of 3.60 per cent with a £199 fee.
While this is great news for borrowers, it may present a bit of a quandary. Do you opt for the security of a cheap fixed rate, even though the threat of an interest-rate rise seems to have rescinded for now? Or do you hold fire for a bit in the hope that fixed rates will get cheaper still? How low can they go?
Much depends on your individual circumstances. If you want to know what your monthly mortgage payments will be to help with budgeting, then a fixed rate makes sense. Given that these are some of the cheapest fixed rates we have ever seen, you won’t go far wrong in securing one now rather than waiting in the hope that they will fall further.
Those borrowers on some of the cheapest standard variable rates (SVRs) or trackers may feel that it is worth the risk in staying put for now while interest rates are low. It may mean that you pay more for a fix when interest rates start to rise but borrowers on the cheapest rates could cope with several quarter-point increases in base rate before they would be worse off than if they had opted for a fix.
But those on the more expensive SVRs – around 6 per cent – may as well consider remortgaging, as the rate they are paying will not fall and they may well be able to secure a cheaper fixed rate, particularly if they have a healthy level of equity in their homes.