Mortgages below 6% to "disappear"
Fixed-rate mortgages below 6% could soon disappear as the cost of inter-bank borrowing continues to rise.
Rates for lenders to secure cash on the money markets for two, three and five years have increased by up to 0.44% over the past month, pushing up the price of fixed-rate deals.
Most of the large mortgage lenders have increased the cost of fixed-rate loans for home buyers, with Nationwide the latest to hike costs. This is the second time the building society, the second largest lender in the UK, has increased rates this month.
Its fixed-rate mortgages have all been increased by between 0.25% and 0.50%, taking its most expensive fixed rate to 7.85%. Tracker deals have also been increased by 0.20%, in a move that takes its two-year tracker up to 6.68%.
David Knight, a mortgage expert at Moneyfacts.co.uk, says it won’t be long before all fixed-rate best-buy products top the 6% mark. “With Nationwide upping its rates it won’t be too long before the big players such as Halifax follow its lead.
"Even the smaller building societies, which have been strong players in the best-buy tables because of the credit crunch, will be forced to increase their rates to control consumer demand for their products.”
In a fix
More than 116,000 borrowers a month are coming to the end of their fixed-rate deals. Mortgage website mform.co.uk warns that fixed-rate mortgages at rates below 6% will disappear over the next few weeks, with those at under 6% including hefty arrangement fees
Marketing and business development director Francis Ghiloni says borrowers should consider discount and variable rate products.
“Mortgage rates are continuing to rise despite concerted action by the Bank of England and it is unlikely there will be many fixed-rate deals left below 6%. The gap between variable and fixed rates is widening," he adds. "Despite this, borrowers are still looking for the certainty delivered by fixed-rates, but we’d urge people to consider variable products such as discount rates.
"Borrowers should always focus on the true cost of a loan taking into account monthly payments and fees.”
But David Hollingworth, a mortgage expert at brokerage London & Country, says tracker mortgages are not suitable for all borrowers, especially those that need the security of knowing how much their repayments will be each month.
He says: “Borrowers coming to the end of their deals need to consider right now what they want from their new deals. With inflation on the up, the base rate could indeed be increased in the coming months, so if borrowers need the security and peace of mind of a fixed rate we’d urge them to grab one now with both hands.”
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.