Cheap mortgage deals are officially a thing of the past. Lenders are hiking their rates on an almost weekly basis in response to the rising cost of borrowing through the wholesale money markets.
As a result, the average two year fixed rate mortgage now stands at just over 7%. To put this into perspective, the average rate in October 2005 was just 4.96%.
This means the thousands of homeowners whose current mortgage deal is about to expire could be in for a massive shock, with monthly repayments rising by up to £200 on a £150,000 mortgage.
So what is your best course of action for surviving this mortgage mayhem?
To fix or to track
As a general rule, you should opt for a tracker mortgage when the base rate is falling, and look to fix when it’s rising. Unfortunately, it can prove difficult to tell which way the rate is going – even analysts seem to get it wrong more often than not – and this is especially true during such tumultuous times as these.
Just a couple of weeks ago the consensus was that the rate had to fall, but now we are being told a rise is necessary to curb inflation. It’s all a bit confusing.
Therefore the best way to choose which type of mortgage you should go for is to let your finances make the decision.
Fix in the face of peril
The more difficult it is to afford that fixed rate deal, the more important it is you choose it.
Put another way, if your finances are already stretched to the limit by the rising lending rates, then you must choose a fixed rate deal, as at least you’ll have the comfort of knowing that your costs won’t rise any higher (and put your home at risk).
The good news is that, while the average two year rate is exceptionally high, there are still a few decent deals left on the market. For example, Skipton Building Society is offering a two year deal with a 90% loan to value (LTV) and a £998 arrangement fee at an impressive 5.79%.
Spend some time comparing prices at the various lenders and you should still be able to find a reasonably competitive fixed rate deal.
Track if you can afford to gamble
If you are in the fortunate position where your budget can easily absorb another base rate hike or two, then you should give serious thought to choosing a tracker mortgage.
The problem with fixed rate deals is that, because of the market instability, you have to pay a higher premium for the security of a set rate.
When the key lenders announced their recent spate of rate hikes, fixed deals increased by around 0.5% on average, compared to 0.3% for trackers.
High street trackers much cheaper
As a result, tracker mortgages are significantly cheaper than fixed deals at many of the high street lenders. For example, Nationwide is currently offering a three year tracker with a 90% LTV and a £599 fee at a rate of 6.14%. A similar three year fix at Nationwide charges an astonishing 6.75%.
That means the tracker would still be cheaper even if the base rate were to increase twice - an unlikely scenario, according to Ray Boulger of mortgage broker John Charcol.
“I find it difficult to see an interest rate rise of any more than a quarter of a per cent, if at all, before we start to see rates fall off quite considerably next year, so tracker deals are clearly the way to go, provided you do not need the absolute security of a fixed rate.”
