To fix or not to fix, that is the question.
Until the last month or so, most mortgage brokers were united on the answer — opt for a fixed rate on your mortgage, taking advantage of historically low interest rates. Since then, the calculation has changed significantly.
Banks' own borrowing costs increased, leading to mortgage fixed rates rising by as much as 1%. But inter-bank borrowing rates have now fallen back again and are at their lowest level for 20 years.
Swap rates — the costs of converting short term to long term borrowing — also fell. But these cuts have not been passed on to mortgage customers.
“The fixed rates are a disgrace compared to the base rate and where the LIBOR [inter bank rate] is,” says Chris Allen, mortgage advisor at Anderson & Macaulay Mortgage Services in Belfast.
There is a reasonable explanation, insists the Council of Mortgage Lenders.
It says that despite the fall in inter-bank and swap rates, mortgage lenders are in practice having to pay more than this to borrow sufficiently in the current economic climate.
Building societies are in a slightly different position from banks as they must raise most of their mortgage funds from savers.
To attract deposits they are having to keep savers' rates fairly high, which has to be passed on to borrowers in the mortgage rates.
Fixed rates look expensive
These factors mean that it is time to reassess whether fixed rates offer the best deals. “Fixed rate mortgages are now beginning to look expensive,” says Ray Boulger of John Charcol, one the largest mortgage brokers in the UK. “Trackers are looking better. In the last month there has been a sharp rise in fixed rates.”
Chris Allen says that his firm is still often recommending fixed rate deals, but they are doing so with more reservations. “Fixed rates are not very attractive,” he says. Some trackers, Allen points out, are now between a half and one per cent cheaper than a fixed rate.
That might seem a lot, says Allen, but, he warns, if interest rates do take off in a year or so, then the fixed rate will have been the right call. However, inflation is at present below the Government's 2% target and the market is now pricing-in expectations of a prolonged recession and slow recovery. This suggests that interest rates could stay low for some time to come — implying that tracker mortgages could be the way to go.
Reasons to fix
There can be good reasons to choose a fixed rate mortgage, even when these are more expensive than trackers. A borrower with a fixed rate knows exactly how much they will repay each month for the term of the arrangement. This provides reassurance, protection and help with budgeting. And, from a historical perspective, fixed rates are, even now, very cheap. The best two year fixed rate deal available in Northern Ireland, as listed by Moneyfacts, is NatWest at 3.69%. But the best five year fixed rate deal is offered by the Chelsea Building Society at 4.80%.
Best buy tracker
While all trackers are linked to the base rate, they vary in the margin charged over base rate, and the floor at which a minimum interest rate is payable. The best buy tracker mortgage, according to John Charcol, is Abbey's, which is pegged at 2.99% over base rate for three years — giving it a net 3.49% at present. The next best are Alliance & Leicester at 3.09% over base rate for two years and Scottish Widows at 3.19% over base rate for two years.
An alternative option to the tracker is the discount rate mortgage, which is linked to lenders' standard variable rates. John Charcol recommends going for trackers in preference to discount rate mortgages, as lenders are not obliged to closely link their SVRs to base rates.
But there is a complication. There have been big changes in the pricing of fixed rates in a short time, rapidly altering the calculation of which type of mortgage offers the best value.
If predictions of a prolonged recession feed into significant cuts in fixed rates, then the calculation could change again. Keep a close eye on both tracker and fixed rate mortgage pricing before making a decision about which to go for.