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ERCs shows why long fix argument is flawed

One of the biggest dilemmas for a borrower now is whether to fix or not. The base rate has risen by 1 per cent in the last nine months and many economists are expecting at least one more 0.25 per cent increase before the end of the year.

However, beyond this, things are more difficult to predict. The Bank of England’s quarterly inflation report suggested that while inflation is higher than its target, that is, the CPI is at 2.8 per cent 0.8 per cent above the target, in the medium term, this should fall back down. This should happen once some of the items like energy prices have fallen back to lower levels. However, in the short term, inflation is stubbornly resisting the base rate increases.

So what should Jo and Joanne Average do with their mortgage? Should they fix now and if so how long should they fix for? These are not easy questions as there is no such thing as Jo and Joanne Average. Each client is different and should be advised as such. That is the whole reason for doing a fact-find and having an advice process.

For anyone taking a two-year fixed rate, personally, I think rates will be lower in a couple of years. We now have the highest interest rates of any G7 country and in the long term that won’t be very good for UK plc as it will keep the pound artificially high which will in turn jeopardise our ability to export and make it cheaper for us to import goods.

Sadly, none of the capped rates that are now around are offering a cap at a sensible level. The base rate would to move to an incredible level before it hit the cap and unless rates then plunged to very low levels, most borrowers would have been better off with a decent two-year fixed rate. If most experts expect the base rate to fall over the next two years, then surely two-year fixed rates look good value for borrowers who need budgetary stability?

This is not a view that is universally held. John Wriglesworth allegedly said at the Manchester Business Expo rec- ently that “brokers who are still selling short-term fixes are a bunch of missellers” and that “if brokers sell a short-term fix now, by the time rates rise, they could find themselves on an 8 per cent or 9 per cent SVR with massive LTVs”.

Since I was not in the audience, I am not sure if John did say this but I have heard him make similar allegations at other expos in the past. Being accused of misselling by someone who has never sold a mortgage does not sit well with me but as John is an economist by trade and a PR guru, I will not take offence.

His suggestion of selling long-term fixed rates is, however, fundamentally flawed by the existence of early repayment charges. Protecting yourself against interest rate rises is very prudent but locking yourself into a long-term mortgage with onerous ERCs is not a sensible way forwards for the majority of borrowers.

I am sure we all remember Professor David Miles’ report on why we were not selling long-term fixed rates.
I don’t think long-term fixed rates are an efficient or valid method of insuring mortgages. Until we see lenders offer-ing long-term fixed rates without long-term ERCs – Nationwide made a brave try with a 25-year fixed with 10 years of ERCs – then we are unlikely to see much take-up.

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