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Boulger on Mortgages

Minutes published from the latest MPC meeting show that the committee voted seven to two in favour of keeping the Bank of England Base Rate at 4.75 per cent, yet some members conceded that a rise may be justified in due course. For the two in the minority, a rise in interest rates was warranted immediately.

So, we have gone from a predicted fall in interest rates to an expected rise in the coming months. As the minutes alluded to, there has been a lot of economic news over the last month. In the UK, GDP seemed likely to continue to grow at broadly its trend rate but the news on UK-weighted world demand is it is on the downside, with a rise in oil prices and signs of weaker euro area growth.

It therefore looks like the next move in interest rates will be up, bad news for some borrowers but good news for brokers. Rising interest rates provide the opportunity to extol the virtues of remortgaging. With, at least, 25 per cent of borrowers still paying a standard variable rate – and that is probably conservative – any potential rise can easily be countered.

Borrowers should not be overly concerned by the prospect of a rise as we still remain, historically speaking, in a low-interest rate environment. However, those looking for a fixed rate, are likely to have missed the boat this time round. This is because one of the main developments in the financial markets over the last month has been the significant rise in short-term and, indeed, long-term interest rates. The rates seemed to increase on the back of last month’s MPC minutes – two-year money is now at 5.1 per cent – and this has led to a widespread change in fixed-rate pricing from a number of lenders. It has been a disappearing act that Houdini himself would have been proud of, and is more a case of who has not pulled their rates. And, true to form, several lenders pulled theirs with little more than a moment’s notice.

Far too many lenders choose to adopt this kneejerk reaction to rising swap rates and pull all their fixed-rates almost immediately. Now, if it is looking like rates are going to fall then this is, in most cases, good news for borrowers as it means fixed rates are also likely to fall. However, in an uncertain market, the possibility of a fixed rate disappearing, only to be replaced by one with a higher rate, brings about an outbreak of activity reminiscent of the Christmas sales.Borrowers rush to get an application in to beat an almost unmanageable deadline and, surprise, surprise, a lender’s service falls apart. Of course, not all lender’s are guilty of this, but for those that are, surely they can put some systems in place to deal with this?

But back to the clients. My advice to borrowers is have a look at some of the other products available, not just fixed rates. Of course, should you need the security a fixed rate brings, then you should take one, but there are some great products about to choose from. Borrowers who are not sure which option to take and are planning on keeping a close eye on pricing, should look at a variable-rate deal with no redemption penalties or a drop-lock facility. Drop locks allow people to drop into a fixed rate at a later date, penalty free.

However, for all the debate on what to take and where interest rates will go, borrowers need to react in some way if they are currently paying too much on their mortgage. It is staggering how many consumers demand value-for-money on everyday items, yet ignore the chance to save money on their mortgage. Someone with just a 100,000 loan – which, let’s be honest, isn’t that much these days – can save more than 100 a month by moving away from an SVR. And if they still don’t see the point, then try this: a basic-rate taxpayer would have to have a pay rise of 1,500 a year to get back the money they are losing by paying an SVR.

Ray Boulger is senior technical manager at Charcol

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