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Prepare For The End of Your Fixed Rate

The Bank of England has now raised the base interest rate five times in the last twelve months, taking it from 4.5% to its current level of 5.75%.

The previous four rises did not seem to have the required effect of curbing inflation. Will the latest rise have the impact needed? It seems that many experts don’t think so, as talk is already of another rise – to 6% - before the end of the year. Some gloomy souls even wonder if that will be the peak!

So why haven’t the previous four interest rate rises done the job?

It seems that the problem lies with the prudent people who took out fixed rate mortgages at nice low rates (now seemingly impossibly low rates) two and three years ago. Fixed rates were available at less than 4.5%. It feels like a dewy-eyed dream now - except that most of those people are actually still on those rates – their repayments haven’t changed, despite the base rate carnage around them. Therefore, they haven’t need to check their spending because, for them, nothing has changed. If high street spending continues unabated then inflation remains a threat – and rates have to rise again!

However, the problem is about to hit these lucky people hard, as many of those fixed rate deals are due to come to an end in the next six months or so. If one of those borrowers on a fixed rate takes no action, then they could see their nice low fixed rate of 4.45% suddenly sky-rocket to something in the order of 7.5% as they end up on the Standard Variable Rate (SVR). For a mortgage of £150,000 over 25 years, payments might shoot up from £835 per month to nearly £1100 – a rise of £265. They will certainly feel that change.

It is important that anyone in this situation avoids falling back onto their lender’s SVR as that is the worst thing they can do.

The advice is to look around for a good deal, and it can take about three months from start to finish, so it’s best to be prepared: check your documentation to see when your current deals ends and get ahead of the game.

Although you might find the best deal yourself, it is best to use a broker who will have all the information at hand and can do the work for you. Finding a broker means finding one who has access to the whole of the market (and is therefore not tied to a few providers), and preferably one who doesn’t charge you. You will need to tell the broker all your details and what you are looking for. Armed with this information, your broker should come back to you with the best deals available to suit you. They may be fixed, discounted or tracker mortgages. If you’re not convinced that they will save you time or money, then consider that they have access to products that are not available to the public, so they really might find a better deal than you ever could.

You might also want to ask for an offset facility, to enable you to make overpayments when the time is right.

Arranging a new deal before you come off your old deal and slip onto the SVR can save you hundreds of pounds, so it worth preparing now and being ready.


Tom Smith
15th July 2007

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