To fix or not to fix...
Posted on 27 April 2009 by
This is a question that is becoming more and more prevalent in the market, to which we believe the answer is firmly the former - now is indeed the time to fix. At the start of this month there were some fixed rate reductions from a number of key lenders and the general sentiment is that this will now be the floor for fixed rates. Indeed, some have begun to edge up again over the last few days. Waiting for any further significant cuts now looks to be a losing game.
The lenders that were able to cut their fixed rates did so because of a fall in longer term swap rates of about 0.3% which came about due to a large fall in gilt yields after the Bank of England announced the details of its Quantitative Easing programme. However, this fall in swap rates has been largely reversed since meaning that the recent trend of fixed rate reductions has now been turned on its head.
So why the increase in gilt yields?
Put simply, there are three main reasons. Explaining them in detail could easily occupy several pages of A4, but we will keep it brief. Firstly, the shock inflation figures released recently; secondly, last month's comments from the Governor of the Bank of England to the Treasury Select Committee effectively telling Gordon Brown to stop flexing the corporate credit card; and lastly, the failure of the long dated gilt auction with only 93% of the gilts on offer taken up.
What does the future hold?
After the fall in the best fixed rates it now looks like the right time to take a fix, preferably for at least five years. The need to fix for longer is driven by the fact that interest rates have to go up at some point, only our old friend Walter Mitty would disagree with that. When this will happen is still open to question, but we believe that longer term fixes are much more likely to help most people ride out the storm that is brewing. In fact, the first quarter of 2009 has seen the biggest swing towards the take up of fixed rate applications from 29% in December to 81% in March.
One struggle many borrowers have at the moment is that when they are currently paying very little for their mortgage each month having to convince someone who is paying 1-2% on a tracker that they should take a fixed rate of 4-5% is a task of Herculean proportions, but it really could be the best move in the long term. With underlying interest rates easily capable of reaching the 6-7% mark, it is no exaggeration to say that pay rates could be priced at 10%+ in the future. Some basic maths will show that fixing in now will be the winning game.
Property Values
One final point worth highlighting is that the ratio of the loan against the value of a property (loan to value) is critical in this market and will be an increasing problem so long as property prices continue to fall. Recent reports suggest that house prices are back to their 2006 levels, with 13.4% being wiped off property values in the last year. This could mean your loan-to-value (LTV) could be worse then it was when your mortgage was arranged and in the short term, it will continue to drop.
If you are near to a major LTV threshold, particularly 75%, reduced choice and higher rates will absolutely work against you. Due to capital adequacy requirements the margin that lenders will demand, and indeed need, for higher LTVs are highly likely to take many a year to come down.
Anyone who has a high loan to value (75% +) ratio and is sitting on their lenders standard variable rate should now be looking at fixing for an absolute minimum of 3 years although we believe 5 year fixed rates to offer more value and stability. Property values will continue to fall this year and lenders will NOT be offering more favourable rates or LTV ratio's meaning it will be harder to come off your SVR the longer it is left. Being stuck on a the SVR in an increasing interest rate environment is not a place you want to be especially as SVR's are traditionally at least 3% - 4% higher than bank base rate and would therefore ask that some serious thought is given around fixing your mortgage.
Getting detailed, independent mortgage advice has arguably never been more important. Ensuring you are in the best place for the next few years will prove to be the winning game.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither John Charcol nor Drew Wotherspoon will accept liability for them.
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