Fixed rate mortgages have reigned supreme over the mortgage market for a number of years and their hold on the industry appears to be getting stronger. With the security they offer to borrowers, most see an attractive fixed deal as a good bet against rising interest rates.
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The Council of Mortgage Lenders (CML) has reported fixed rates have never been more popular, with home buyers swooping to sign up for them. A record 87 per cent of first-time buyers opted to go for a fix in February, while 70 per cent of all home movers chose fixed rates. The CML added that these types of loan accounted for 76 per cent of all loans for house purchase – the highest level ever achieved and last seen in November 2005.
While a further rate rise is expected in May or June, predictions from industry commentators are for the market to stabilise and then the Bank of England to consider dropping rates back down in the Autumn. So, with this rate cycle expected to top out at 5.50 or potentially 5.75 per cent, is it really such a wise move for borrowers to take out a fixed rate in the current climate?
A false economy
Ashley Clark, director of Need An Adviser.com, believes fixed rates represent false economy for most borrowers. “When you start to analyse the fees involved, a lot of people would be better to go for variable or discounted deals. When someone has got a high arrangement fee, the break even point can be five or 10 years. Most variable rates don’t have explicit arrangement fees, while fixed rates do.”
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While Ray Boulger, senior technical adviser for John Charcol, does not think arrangement fees play such a key factor, he does concur that now is not necessarily the time to fix. “What the man on the street doesn’t realise is that current fixed rate prices already factor in another rate rise. Borrowers are already paying a price that reflects expectations and they are not beating the rise. For those that want security and it’s not so much about finances, then a fixed rate makes sense. We’re talking about people who can take some risk and afford to be wrong.
“Trackers are a 0.25 per cent less than fixes when it is like-for-like with fees and term. If rates do come down, which looks like a possibility, then there is a broad basis to go for a tracker. There will be a time when it makes sense to buy fixed rate, but I don’t know when that will be.”
Better the variable you know
Mark Chilton, chief executive of Homeowners Mortgages, points out the differential between fixed and variable rates is such that even if rates went up another 0.25 per cent and stayed at that same level over the next two years, it would still be better to opt for a variable deal. He adds: “Borrowers are paying a premium for the certainty of a fixed rate. The reason for the rush is that people are stretching their affordability and are sensibly deciding to pay a bit more for stability. While I don’t think this is the right decision from a purely financial point of view, I am sympathetic to people wanting that security.”
Chilton also notes with interest that people’s mentality has progressively shifted from immediately taking the cheapest initial monthly payment to being sensible and taking a fixed rate mortgage.
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Clark adds that much of what a broker advises will come down to the client’s attitude to risk. He explains: “I’m not saying people shouldn’t consider fixed rates. For the cautious investor who wants to know what they will pay for the next two or three years or someone right at the limit of their borrowing, then fair enough. But for someone already on the property ladder, who can afford even a 1 per cent rise, then no. They will be locking themselves into a rate that will come down.”
Taking a long-term view
For Boulger, the most pertinent issue is to take a long-term view over merely considering what will happen in the next six months. “There is broad consensus about what will happen in the next few months, but a mortgage is about the next few years and looking that far ahead is problematic. Intermediaries should have an opinion on it but not force their own view. They need to have a good discussion with their client on the pros and cons of all products. It may well be that the discussion shows a two-year fixed mortgage is the best deal, but most clients do need guidance as to what product they need. People have to have a longer term view.”
The stampede to fix is unlikely to diminish any time soon, as people hear rumours of rate rises and fear the worst. Yet, while it does come down to an individual’s circumstances, the lure of the fixed may not be all it is cracked up to be. Sometimes a little risk is worth the uncertainty.
