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Mortgage Holders Advised to Fix

As Northern Rock savers queue to remove their savings from the bank, and as mortgage rates start to creep up again, experts are advising home owners to stick to fixed rates in the short term.

There are 11.7m mortgage owners in the UK, most facing uncertainty about their mortgages over the next few months to a couple of years. Of all these the real losers will be first-time buyers and people hoping to join buy-to-let property investors, as these are both seen as riskier groups by lenders.

Last week, some lenders pulled all their offers of mortgages over 95% loan-to-value (LTV) as they began to tighten their conditions for loans. Although buy-to-let investors have a comparatively good track record when it comes to making repayments, their rental incomes have not been keeping pace with the rises in mortgages. Lenders’ criteria will take this into account and investors will find mortgages harder to come by.

Mortgage rates are on the way up again, but most financial markets have been on the way down. Mortgage lenders price their mortgages on the basis of two different wholesale markets: one is the base rate, and the other is Libor – the inter-bank lending rate – which has been shooting up recently. Abbey and Halifax raised their tracker rates for new customers, even though the Bank of England’s base rate hasn’t gone up since July. There has traditionally been a link between the Bank’s base rate and mortgage rates, but this is becoming looser in the current financial climate. The worry is that if Libor continues to go up, then mortgage rates will inevitably rise for new customers, and probably for existing customers too. On a £150,000 mortgage rises of £15 a month are likely fairly soon.

Fixed rate mortgages, however, are priced against the swap-rate market. This rate forecasts where interest rates will be in the future and – given the Bank of England’s halt to base rate rises, and forecasts for cuts – the swap rate has come down. As a result of this the Woolwich and the Leeds Building Society were able to offer good fixed rate deals, and they were followed by First Direct. The Woolwich, owned by Barclays, has a rate of 5.59% for ten years for anyone wanting a loan of less than 80% LTV. Leeds’s offer is 5.64% for two years.

So far this year, many home owners have opted to go for a fixed rate deal. According to the Council of Mortgage lenders, in July 79% of all mortgages were fixed. The figure was a mere 18% five years ago.

Before the end of this year 800,000 home owners will need to re-negotiate their mortgages. The fact that fixed rates are coming down will come as a welcome relief in a tense period.

The recommendation by experts to fix is a change from a few weeks ago. Then, with the Bank having left the rate at 5.75% and with inflation coming surprisingly fast, the advice was to go with a variable rate as interest rates were forecast to come down. Then came the credit crunch and everything changed.

Tom Smith
1st October 2007

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