My Financial Tips

Given that the central banks have set the base interest rate at a record low, is it time to be looking fixed rate mortgages? You will be forgiven for expecting that because rates are about as low as they are ever likely to be, then now is a good time to fix a mortgage. But be wary of doing this and take professional advice before you try to compare today’s mortgage rates on your own!

Yes, the base rate is lower than ever before, but at the time of writing, the banks are yet to announce if they will reduce their interest rates. If they do, it will be the variable rates that will reduce – the rate they charge to customers that are not on special deals. This will also apply to capped rates and discounted mortgages.

But the lenders are not stupid. They know that with mortgage rates at a record low, rates are more than likely to climb back up in the future – especially over the period of a 25-year mortgage. They will be calculating whether they think the central banks will keep the low levels for a short time, reduce them further or start to raise them back up later in the year.

If the lenders think there is any chance of base rate rises in the next 12 months, then they are not going to tie their own hands by offering low rate fixed mortgages for 2, 3 or even 5 years. Instead, they will offer cheap looking fixed rates that switch to the variable rate at the end of 2009 . Or they will add a a small amount onto the rate and let it run into 2010.

So who out of the many mortgage payers are likely to be benefiting at the moment from the low base rate? Well the third on fixed rates definitely are not – their fixed rates have stayed where they are. Variable rates, including discounted and capped rates, might have fallen, but with reports that only 19 of the 90 banks passed on December’s cut fully, there’s a good certainty that those on variable rates aren’t seeing great reductions either.

The borrowers saving at the moment is supposed to be those on tracker products, but even some of these have protection for the lender built into them, stating that if the central bank’s base rate falls below a given level they don’t have to keep tracking it, whilst other banks have increased the amount above the base rate their new tracker mortgages track.

Are trackers the way forward and you should try to compare best mortgage rates for these? Well with capped floors and an increasing gulf between base rate and rate charged, plus the chance base rates will climb over the following couple of years, it is anyone’s guess what is best. It all relies on your financial situation and outlook. Are you happy to take the risk of a low rate with trackers, but can afford to pay if they do go up? Do you need to budget closely with a fixed rate mortgage so that you can budget what you will be spending? You must speak to a financial advisor who can advise you.

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