Fixed rates mortgages head downwards

With speculation mounting that the Bank of England could cut interest rates next month, now is not a bad time to reassess your mortgage.

Last week the Monetary Policy Committee held base rates at 4.75 per cent for the eleventh month in a row but weakening economic figures now point to the likelihood of a cut in August, according to economists.

Nationwide, First Direct, Woolwich, Halifax, and Northern Rock have all cutrepriced their fixed-rate mortgage dealsdownwards in the past few weeks and more lenders are expected to follow suit.

Fixed-rate mortgages are set according to swap rates on the money market – the mechanism through which lenders borrow fixed-rate funds for retail lending. These rates rose earlier this year as many economists thought that Bank of England base rates would go up. But, despite a blip following the London bombings when swaps rose, these rates have been on a downward trend for the past few months.

Two-year swap rates have dropped over the past week from 4.6 to 4.1 per cent. In turn two-year fixed-rate mortgage deals have come down from about 4.7 per cent a few weeks ago to less than 4.4 per cent today.

The more bad economic news that emerges, the more the downward trend is likely to continue, say experts.

“The main risk to inflation appears to be the price of oil, the movement of which has become notoriously difficult to forecast,” says Ray Boulger, of John Charcol, the independent mortgage advisers. “But higher spending on oil-related products will obviously feed through to deflationary pressures in other areas and will not only weaken the UK economy further but also have a similar impact on a global basis. Therefore a base rate cut next month looks a very strong probability.”

The drop in swaps has meant that banks and building societies can secure funds at lower rates and societies are able to offer more keenly priced mortgage deals. “Lenders are playing catch-up with their fixed rates on the back of falling swap rates with the markets discounting a base rate cut to 4.25 per cent,” says Boulger. “But with the rate looking increasingly likely to fall below 4 per cent next year, the cost of fixed- rate mortgages has further to fall.”

Fixed-rate deals are starting to look very attractive. Nationwide announced on Tuesday that it has cut its range of fixed-rate mortgage deals by 0.1 to 0.3 percentage points. Chelsea Building Society also cut its fixed-rate deals on Tuesday, by 0.34 percentage points. 

First Direct has knocked a full percentage point off its mortgage rate for new loans, taking it down to the base rate of 4.75 per cent. It will match base rates until 2006, when it reverts to a standard variable rate of 5.75 per cent.

But the decision facing most borrowers now is whether to go for a fixed-rate or a discounted deal. Most discounts run for up to five years and are linked to the lender’s standard variable rate (SVR). While always lower than the SVR, a discounted rate will move up and down in line with it.

Simon Jones, director at Savills Private Finance, financial adviser, says: “Anyone concerned about rate hikes should think about fixing their mortgage now but if you can hold out a little longer then you could benefit from further rate cuts. There are competitive discount and tracker mortgage rates around at the moment that would allow your mortgage to follow the rate downwards if that’s where you think it will go.”

For those that don’t want to risk it, Jones says Portman building society has a five-year fix at 4.06 per cent and Halifax has the cheapest two-year fix at 4.29 per cent.

Borrowers wavering between a fixed or variable rate could consider a tracker or discount deal with no early redemption charges or a “drop-lock”. Drop-locks give the borrower the option of dropping on to a fixed rate later, penalty-free. Charcol offers a drop-lock, three-year tracker at 4.69 per cent.

However, the decision is not as simple as finding the cheapest rate because the cost of transferring to another lender can outweigh the benefits of a low rate.

The fall in rates is expected to buoy the housing market which has experienced a slowdown over the past nine months.

“If rates do continue to fall into next year and we see a base rate of around 3.5-4 per cent again, then the effect on house prices could be quite dramatic,” says Simon Tyler of mortgage broker Chase De Vere Mortgage Management.“Across the market as a whole, prices may begin to rise a little because buyers will probably give in more easily to stubborn sellers who are refusing to reduce their asking prices if the cost of the mortgage comes down to compensate.”

He says rate cuts would improve mortgage affordability putting a house price crash out of the question. “It’s the danger of prices spiralling out of control that we would then have to worry about,” says Tyler.