Mortgages: time to switch?

A leading economic think-tank recently suggested that the Bank of England will have to increase the cost of borrowing to 8 per cent over the next two years in order to head off the threat of inflation. That means we could see mortgage rates rising to as much as 14 per cent. So is this just the opinion of one lone economist?

It could be. Many economists disagree with the view that rates will go up by that much over the next few years. But as Ray Boulger, senior technical manager at John Charcol, points out the only way for interest rates is up.

So the question we asked him was - is this the time to switch from a variable rate to a fixed rate?

While Boulger thinks rates will stay low over the next few years, he says if you're worried about an increase then it's time to consider your next move. If you currently have a variable or tracker mortgage, you need to be confident that you can handle your mortgage payments if rates go up by 2 to 3 per cent.

If you don't think you can handle the higher payments, Boulger says a five-year fixed term is your best option. While there are a lot of two-year fixed mortgages on the market, it may not be the best solution.

He says that if rates rise quickly over the next two years, you will lose out when you have to re-mortgage again in 2012. If rates stay low, then you would have been better off with a tracker or variable mortgage.

The major sticking point when looking for a new mortgage is your loan-to-value (LTV). If you don't have a 75 per cent LTV, you are looking at a higher interest rate. And if you're a first time buyer, the only way to get a competitive rate is to have a large deposit ready and waiting.

A recent survey by Rightmove showed many banks are demanding an average deposit of 25 per cent of the asking price. That's compared to just 10 per cent needed before the financial crisis.

Rightmove points out that just one in five prospective buyers are making their first purchase. That's the lowest number on record. Without those buyers snapping up first time homes, property chains could very well collapse thereby undermining the housing recovery and affecting prices across the board.

For those lucky enough to be able to afford a deposit, many are looking towards family members for help. The Council of Mortgage Lenders found that 83 per cent of first time buyers under 30 get financial help from their parents when purchasing a home.

If you already own a home and are looking for a new mortgage, you may not have to look any further than your own bank. Quite a few high street banks have begun offering a range of loyalty mortgages offering current account customers reductions. Barclays, Santander, Co-Op/Brittania and Halifax are all offering reduced rates in order to entice existing customers to stay close to home.

Finally, Boulger says banks are still adjusting their rates and thinks there's more downside to come over the next few months. So you still may have some time before you have to make a final decision.

About John Charcol

John Charcol is an independent mortgage broker. Unlike a mortgage company that can only offer you their own products, John Charcol searches the whole market to bring you the best products from all lenders.

John Charcol has become the UK's leading independent mortgage broker by consistently providing a fast, uncomplicated service for people who are often in a hurry and just need someone they can trust to take care of the details.
www.charcol.co.uk

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