Is it time to fix my mortgage rate?

Posted on: 23 June 2009 by Gareth Hargreaves

Is it time to fix my mortgage rate, and are we near the bottom for the housing market? Independent financial advisor Peter McGahan explains.

I will answer the housing market question first: If you had asked me three months ago I would have said absolutely no chance. Here I am only weeks ago saying that the economics didn’t support a bounce but there are a number of factors that look very promising.

The last housing market correction in 1989 took three years of falling prices before there was a turn. Indeed someone buying in 1989 would have been in negative equity for nearly seven years.

The Bank of England is mindful of that and not wishing to make the same mistake again, they have been very aggressive with interest rate policy and quantitative easing. It appears to be working.

Since 2003 I have been cautious on all property, but since the Bank of England bottled it in 2005, we have advised against property purchase on the basic grounds that it didn’t offer a sustainable return over a risk free asset – cash. This was a clear sign to get out.

Whilst logic says the housing market needs to fall further, often logic has no brakes for sentiment.

With interest rates at such a low level, government incentives and grants to assist first time buyers, and unemployment not hitting anywhere near the expectations, buyers are returning in abundance.

Interestingly our enquiries for mortgages and mortgage advice are higher now than the peak of the mortgage market. Each of the last three months have been 100% greater than the average, and June looks like it will be over 200% better.

This is a clear support level for house prices through extra demand and it’s very possible the 1989 issue has been averted. Good news at last.

Should you fix your mortgage rate? That’s an interesting one. Last week most lenders withdrew their fixed rate offerings and replaced them with higher rates. This is in anticipation that rates will begin to rise, which is peculiar, given that we have benign inflation. In fact the retail price index is still at -1.1%.

Either way the anticipation is that rates will rise and fixed rate mortgages are now c20% more expensive than they were last week. Should you fix now? It very much depends on what your current mortgage deal is. For example, some lenders set their own standard variable rate and that is typically around 4.8% today whilst others track the base rate and that’s down at 0.5%. For some it would be quite a leap to hop from 0.5% to today’s typical fixed rates. The typical fixed rates are: two year 3.98%, three year 4.99% and five year is 5.64%.

And so it’s a much more difficult decision for you if you are on a lower tracking rate as above but a sure fire winner if you are on a standard variable of around 4.8%.

Much also depends on the impact of quantitative easing. If the extra money in the system bites, inflation is a real risk and interest rate rises will be the quickest way to slow down the economy.

With that in mind, a three year deal at 4.99% looks like a bargain with the safety of knowing what you will be paying for the next 36 months.

The better rates are still being offered to those who borrowed less in relation to the value of the property (i.e. loan to value). For example if you are borrowing less than 75% loan to value you could have a two year fixed rate at 3.09% whereas if you are borrowing at 90% loan to value, the best two year fixed rate is 5.99% - almost double!

Finally be careful when you are looking at mortgage rates and ensure you look at all the underlying fees as they can soon mount up.

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