Time to Buy a Fixed Rate

But surely somebody paying less than two per cent on their mortgage should still hold on as they are saving so much per month?

Andrew. I agree with that and probably also anyone paying 2.5% on Nationwide or Cheltenham & Gloucester’s SVR can afford to wait before switching, but subject to their loan to value. An increasing problem as property values fall is that more and more people are finding their LTV has risen above 75% and it then becomes very difficult to get a decent fixed rate

Also most borrowers with a cheap tracker will have early repayment charges until the deal ends and that will be another reason to stick with the tracker until at least the end of the ERC period. But anyone who took out an expensive tracker recently with a droplock option (as offered by Nationwide, Cheltenham & Gloucester and Woolwich, although Woolwich no longer offer this) should seriously think about switching to a fix.

Also, because most SVRs are between 4% and 6% many borrowers on an SVR will be able to switch to a fix with only a small increase in their rate or even a decrease, again obviously subject to their LTV. It just doesn’t look as if fixed rates are going to get much cheaper, even if Bank Rate stays at 0.5% until well into next year.

Halifax and Bank of Scotland borrowers are well placed when they come to the end of their deal as they are both currently offering good fixed rates for existing customers, even if they have little or no equity. For example Halifax offer a reasonable product transfer rate fixed to 30/4/14 at 4.54% with a £999 fee up to 60% LTV, but the rate only rises to 5.29% with a £1,249 fee for borrowers with less than 5% equity or even no equity at all, which is excellent value.

Some lenders have recently reduced the length of time you can reserve a fixed rate in advance of completion and with most lenders the period is now between 3 and 6 months and so anyone whose tracker or fixed rate deal ends in less than 6 months should start getting advice now on their options.

Dear Ray,

My fixed rate runs out in April 2009(4.99%). If I did nothing, I could have gone on to the SVR of 4.69%. I reckon my LTV is about 70%. I have converted straight on to a fixed for 10 years at 5.29%. Have I been a bit naive?

Tom
I don’t think you have been remotely naïve. 5.29% is a good rate for a 10 year fix @ 70% LTV and with property prices likely to continue falling for the next few months if you stayed on the cheaper SVR for a while and then tried to switch to a fix it is quite likely the valuation of your property would have declined sufficiently to push your LTV over the 75% threshold, especially bearing in mind that on remortgages valuers are likely to be conservative. Once the LTV goes above 75% the cost of a 10 year fixed rate rises sharply and the choice of lender is much reduced. Furthermore, I think the price of 10 year fixes is close to the bottom of the market unless significantly more money becomes available in the next few months for the banks and/or building societies to lend, which looks unlikely.

Particularly for those on relatively low tracker rates currently, would it not make sense when comparing a 5 years fix to a tracker to consider expectations as to the AVERAGE base rate over the next 5 years and not simply the expected upward trend from the historical low base rates today ?

In December 2008, my 3 year fixed deal came to an end. It was evident that interest rates were heading on a downward trend so I selected a tracker (with no penalty to switch away in the future) and paid a £800 fee up front for the pleasure.

But, interest rates will surely increase in the future and this has given me a problem because my instinct is to always select a fixed deal but in December 08 the rates on offer were not competitive at all.

If fixed rates are good value should I consider fixing so soon? I've paid £800 upfront.

I'm on a tracker with Nationwide and currently paying under 3%. However, I would love to use my 'drop lock' option and fix for next 10 years BUT NATIONWIDE NO LONGER OFFER 10 YEAR FIXED RATES! Why is this the case, Ray, and is this likely to change in the near future?

Nigel,
I completely agree and that is what I have done. It is difficult to know when interest rates will start to rise but one thing you can be sure about is that fixed rates will increase before Bank Rate does as the market will anticipate rates rising. However, the market doesn’t always get it right – hence the old joke that the market has predicted 7 of the last 3 recessions.

Nevertheless when rates do start to rise there is a much greater danger than in other recent cycles that they will not only rise more quickly but stay high for longer to counter the inflationary threat that could easily emerge when the economy recovers as a result of all the money now being pumped into the market. It may not be that bad but for most people an insurance policy against not being able to afford their mortgage if rates rise steeply makes sense. In these uncertain times for those on a limited budget it is better to pay a little more for the mortgage on a fixed rate that is definitely affordable rather than gamble with a variable rate which might become unaffordable. If rates don’t go up too far or stay up for very long it doesn’t mean it was wrong to buy the insurance policy of a fixed rate. After all just because your house doesn’t burn down most people wouldn’t say it was a bad idea to have buildings insurance.

Mario,
Without knowing more of your details I can’t be too specific. For example if your LTV is close to one of the important thresholds where interest rates increase, i.e. 60% upwards, as long as property prices continue to fall, the interest rate you will have to pay will increase if your LTV increases and that could easily outweigh any further general reduction in interest rates. If you have plenty of equity and so a declining LTV is not an issue then staying on your cheap tracker for a little longer probably makes sense. I think fixed rates are now close to their floor but I don’t think they will increase significantly in the short term – in fact they probably won’t increase much until next year. So the cheaper the tracker rate you currently have the more it makes sense to delay switching to a fixed rate, proving your LTV is low enough for your mortgage not to be likely to creep up about 60% or 75%. But watch the market closely. If you wait until Bank rate starts rising you will have missed the boat.

Ralph,
I have asked Nationwide the question and here is the answer they gave me: “The cost of 10 and 15 year swaps are high which would mean entering the market with rates between 6 and 7%. A product priced at this level was considered unattractive to customers and therefore not a market that we would offer present.”

However, I don’t buy this excuse because 10 and 15 year swaps closed today at only 3.64% and 3.99% respectively, which I certainly wouldn't call high, although admittedly they are a little off the bottom. Even in today's market where lenders’ gross margins are relatively high I wouldn't expect Nationwide to charge a margin as high as 2.5% - 3% over swap rates, at least not for a low LTV mortgage of up to 75%. Indeed their cheapest rates for 2, 3 and 5 year fixes are priced with margins about 1% less than this.

I suspect the real answer is that as, like all lenders, Nationwide, needs to control the amount of new mortgage business it takes on it has decided to offer a more limited product range than used to be normal and the 10 year fix has suffered in the cull. It is possibly also partly due to the fact that the market in longer term swap rates is very thin at present and so Nationwide may currently have difficulty buying sufficient long term funds to enable it to be comfortable offering a 10 year fix.

As I mentioned above, although I think fixed rates are close to their floor I don’t see them increasing significantly before next year and so, Ralph, I think you will have a window of several months in which to switch to a fixed rate. I would be surprised if Nationwide don’t offer a ten year fixed rate again before the end of the year and so you will just need to monitor what mortgages they are offering when they change their product range, which currently they do about once a fortnight, and watch out for a ten year fix.

When I came off my 2 year fixed rate, my lender insisted I was in negative equity (108% LTV), according to the Halifax Index. I decided to risk paying for a valuation which came out at 74% LTV!! How many people just take the lender's word for it, when the valuation may be way wide of the mark... Is this common?

Simon,

Good to hear from you. Recently we have had more cases where clients are challenging the valuation, with mixed results so far. As you would expect some people just haven’t recognised how far the market has fallen or mistakenly think that their properly has significantly outperformed the market. But in other cases the automatic valuation is clearly wrong and it is just a question of by how much.

In one recent case the lender was way out because of major home improvements, which of course the automated valuation can’t cope with. It would not seem unreasonable to expect that if the mortgage application says the property has 5 bedrooms and the valuation is provided on the basis of the pre improvement 4 that the lender should have a system to flag up such discrepancies.

Lenders clearly prefer to put the onus on borrowers or their broker to challenge valuations that are too low, and hence put them to extra trouble to get a robust figure, rather than try harder to get it right first time. Either they cynically don’t put any value on the client’s and broker’s time or they take the view that if they undervalue the property they may be able to charge the client a higher rate if the low valuation pushes the loan to value above one of the thresholds, such as 75%.

This attitude ignores the fact that the aggrieved customer might not be prepared to get a second opinion on the value of their property and will instead prefer to remortgage.

To sum up I don’t think your experience is common, especially for such a huge discrepancy, but it is far from unique and is becoming more common.

Ray