When should I change my mortgage?

Posted on 11 October 2007

My 2 yr fixed rate mortgage with Nationwide ends in March 2008 (4.84%). I am looking to take out a 5 yr fixed rate mortgage yet cannot decide when to reserve it. with the lowest fixed rates at about 5.6% it is tempting to reserve one now. Alternatively, is it worth waiting until next year to see if fixed rates come down following an expected BofE base rate cut? Will a cut in base rate automatically results in cheaper fixed rate mortgages?

Elliott

Hi Elliott,

Fixed rates are governed by "Swap" rates which are priced up as an expectation of what that bank base rate will look like x many years in the future.  So for example if the City thinks that the Bank Rate (currently 5.75%) will drop down to 4.75% in five years, the five year swap rates will fall to near that level, this is what lenders buy money off each other at, so the fixed rates they then come out with as a result, will look fairly similar to 4.75%.

So in short, when Bank rate drops, it will slightly affect swaps, but not as much and generally less and less the longer timescale you're looking at.   Two year swaps are easier to predict as you imagine.  They flew up again 0.25% last week after Mervin King head of the Bank of England said he wouldn't bring the Bank rate down just yet as it makes inflation creep up and he wants to keep inflation near 2% or less.   However, the quarterly inflation report is out tomorrow, and if inflation is still low at 1.8% or 1.9% (anything below 2%) Mervin King should leave Bank Rate the same, might even drop it, but certainly won't have much reason to put Bank Rate up in the near future.

If you want to reserve a low fix, you could always apply through a lender who offers a fixed rate with free valuation and legals, and an arrangement fee that you can add to the loan, so you have minimised the up front cost that you can potentially lose for good.  Lots of our clients whose deals are finishing now so they have to make a quicker decision than you, are remortgaging to tracker rates with no Early Repayment Charges so that they can wait and see.

As with anything, no one has a crystal ball, and you are right to protect yourself in which ever way you can.

Katie.

 

Category: Fixed or Variable?, Lower mortgage payments, Remortgaging

• Save to del.icio.us
• Digg this story