Since the Bank of England Base Rate rise last month, which surprised many in the mortgage market, there has been a stampede by borrowers to shelter with fixed rate mortgages, accompanied by a clamour of complaints that lenders were pulling many fixed rate mortgage products from the market, denying many the chance to avoid the Bank’s next iminent increase in interest rates.
Despite the Monetary Policy Committee’s decision to hold rates earlier this month, there is every expectation that it is not if, but when, we will see another quarter point rise. So in the eyes of many, the attractions of fixed rate mortgages would seem to remain.
However, we believe there are plenty of reasons to stop and think about the consequences of locking into a fixed rate at this point in time, and that there are many reasons to expect a rise in the popularity of variable discount products, over the coming months.
Close to the top
Primarily, we strongly believe that fixed rates are currently ‘close to the top of the curve’, with markets already pricing in the next rate rise. It is also widely expected that rates are very likely to fall over the next 12 months or so. Therefore, borrowers opting to fix now could well be doing so at the peak.
With three rate rises since August 2005, and an additional quarter point rise expected in the near future, we will have seen an increase of 1 per cent in under 18 months. The last time that this happened – in 2004 when the Base Rate rose four times – it then stabilised for a year, then fell and stabilised again for a year until August 2006. It is very likely that over the next two years – a typical fixed rate period – rates will fall, and indeed some economists have predicted rate reductions by late 2007 and early 2008.
Discount benefits
So, should borrowers now be looking for variable rate discounted products instead of chasing down fixed rates? While not offering the certainty of a set monthly payment, there are many advantages to discounted mortgages – not least the opportunity to benefit from future rate reductions.
Discount mortgages offer an obvious saving from the lender’s standard variable rate and are typically available over two, three, or five-year terms. Like most fixed schemes they usually involve early redemption charges for the period of the discount.
According to the Council of Mortgage Lenders figures, discount mortgages peaked in popularity in the UK in 2004, with 44 per cent of borrowers selecting them in February that year. Since then they have fallen to as low as 9 per cent of the market but are now on an upward trend, most recently 15 per cent, which was reported in November 2006. We expect to see the popularity of these products rise significantly over the coming weeks and months as borrowers and their advisers recognise the potential for future bank rate reductions.
Expecting growth
Some lenders are clearly expecting to see a growing market for this type of mortgage with the recent launch of a number of improved discounted home loan products.
With current pricing of some discount schemes at below 5 per cent, a further increase in Bank Base Rate of 0.25 per cent would still leave these products with a lower repayment than most fixed rate deals. Although there are a number of fixed rate deals at comparatively low rates, the premium for these lower rates is contained in the unrealistically high fees which have shown a noticeable increase recently – typically £699 to £999 but as high as £1,499 for one competitively priced five-year deal.
For anyone coming to the end of their current fixed rate deal, they are likely to be paying around 4.60 per cent. With fixed rates now being priced well above 5 per cent and growing product fees, the discount schemes offer a real alternative, with the prospect of only a modest increase in monthly repayments and generally lower fees when compared to the fixed rate options.
2006 has been all about the fixed rate mortgage, and quite rightly when the prevailing interest rate trend was upwards. But have we now reached the tipping point where discount schemes make their comeback?
