by Mark Johnston
Home owners in the UK have long been faced with the tough dilemma of whether to fix their mortgage ahead of any interest rate increases or to stick with a cheaper variable rate. Mortgagerates.org.uk have long discussed the pros and cons of getting a fixed rate mortgage but in reality, it just depends on individuals circumstances and how much risk they are willing to deal with.
Over the last few months, experts on the other hand have been suggesting that borrowers should rush out and fix their monthly payments quickly by securing a fixed rate mortgage. This has been driven by many analysts predicting a rise in interest rates due to the higher than expected inflation rates over the past few months. If interests were due to rise, and rise quickly, it would make good financial sense to fix mortgage payments so that borrowers were shielded from such rises. The question though is whether these predicted rises will come or be as quick as first expected.
Nationwide have been the first large mortgage provider to speak out and highlight the issue with fixing now. Chris Rhodes, Nationwide’s product and Marketing director highlighted his concern over mortgage brokers pushing fixed rate products as they were rewarded better than other types of products. His concern was that the difficult mortgage market and poor performing house market was causing some brokers to think more about their profits than the needs of their customers. Mr Rhodes suggested that some mortgage brokers may even be churning mortgages to get fee. Churing is where a broker will sell multiple mortgage product to the same customers to gain more fees instead of securing new business they will contact existing customers who they may have recently sold a variable rate mortgage to and suggest that they should opt for a fixed rate mortgage. This practise earns the broker extra fees although the customer may not need to change their mortgage.
Mr Rhodes went on to say: “No one knows where rates are gong to go. It has to be down to your judgement what you decide to do. That is not to say that you don’t fix. If you are on a standard variable rate of 2.5pc and you are offered a two-year fix at 4.5pc, you have to comfortable paying that extra 2 percentage points as insurance. You may feel that you can afford to take the hit if rates rise – even if they rise by as much as 1.5 points, for instance. If the market was confident that the Bank of England had come to a point when the economy had stabilised and Bank Rate didn’t need to keep rising, then swap rates may fall again – and so would fixed rates.”
Although the Bank of England base rate is often tracked and commented on in regards to mortgages, its actually swap rates that are used to price home loans. Swap rates are the cost that lenders incur when they raise funds to be able to lend to their customers. Swap rates have been on the increase for the past few weeks although the base rate has not moved. This is because a number of factors can effect the cost of wholesale borrowing although the base rate is a major factor. If the Bank of England increases, swap rates will go up and as a result so will mortgage rates.
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