Although interest rates are at their highest level for almost two decades, mortgage experts believe now is a good time for homeowners and home buyers to lock into a fixed-rate loan.
They argue that despite rates in the wider economy rising to 4.25 per cent, mortgage prices have been steadily falling in recent months, making some fixed-rate deals extremely competitive.
In the wake of Kwasi Kwarteng’s disastrous Budget last autumn – causing mayhem on the stock market and gilt prices to collapse – the average five-year fixed-rate home loan was 7.6 per cent.
But according to rate scrutineer Moneyfacts, prices have come down steadily, partly as a result of Jeremy Hunt’s calming impact as Chancellor of the Exchequer.
The average rate for the same fix – again borrowing up to 65 per cent of the value of the property – now stands at about 5.3 per cent. One of the cheapest fixes is Virgin’s offer of 3.82 per cent plus an arrangement fee of £995 for the same loan-to-value.
David Hollingworth, an associate director of Bath-based broker London & Country Mortgages, says: ‘We could well be close to the base rate peak, and lenders are anticipating this by offering some great new competitive home loan deals.’
He believes that for first-time buyers and homeowners nervous about the future – especially over job security and house prices – a five-year fixed-rate loan is a sound option. He adds: ‘If you worry about money issues, a fixed-rate deal offers certainty in an all-too uncertain world.
‘Many lenders believe interest rates have just about peaked and might soon fall – and this is being factored into new, attractively priced mortgage products.’
The 3.82 per cent five-year, fixed-rate loan from Virgin will tempt homeowners coming to the end of a deal and who have a significant chunk of equity tied up in their home.
For first-time buyers with a 10 per cent deposit, Virgin’s 4.42 per cent five-year fixed-rate offer is attractive. The set-up fee is also £995.
Ray Boulger, mortgage expert at rival broker John Charcol, also believes a five-year fixed-rate loan will suit many homeowners.
He says: ‘I do not see many mortgage offers improving in the short term. You could lock into a two-year fixed-rate loan in the hope of lower mortgage rates in 2025, but it’s a gamble.’
He adds: ‘You must also factor in set-up fees and the slightly higher rates payable on a two-year deal.
‘As a result, the benefits of such an approach may be only marginal. The comfort of knowing exactly how much you must pay for your mortgage for the next five years may be a more tempting route to go down.’
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For those keen on a short-term, fixed-rate option, Barclays has a two-year loan at 4.1 per cent. This is based on 60 per cent loan-to-value and has a £999 arrangement fee.
For those with less than 10 per cent equity in their homes, Santander has a 4.81 two-year fixed-rate deal with a £999 arrangement charge.
The International Monetary Fund predicts that interest rates in the UK are likely to remain low this year, with the economy expected to shrink by 0.3 per cent.
The Bank of England will next make a decision on interest rates in May. The current base rate is the highest for 19 years. Inflation, running at 10.4 per cent, is expected to tumble later this year as energy prices and the cost of imported goods fall.
Some homeowners may be attracted by a two-year variable rate deal from Nationwide Building Society which charges 0.24 per cent above base rate – a current interest rate of 4.49 per cent. There are no early repayment charges and the loan is available to those with at least 40 per cent equity in their homes. The set-up fee is £999.
Boulger says: ‘Given that fixed-rate deals are becoming cheaper, variable rate mortgages are rarely better value, but the Nationwide offer is appealing.
‘Remember, fixed deals let you fight another day if issues in the wider economy go wrong and interest rates start heading skywards at a rapid rate.’
Before jumping ship from your existing lender, Boulger says it is worth contacting it to see if it is offering any competitive loan transfer rates.
This will enable you to take a new deal without having to pay an arrangement fee or switch provider.
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