Deal or No Deal? Which Rate Will You Choose?

Interest rates have been low for some time now.  The Bank of England (BoE) kept the Base Rate at a record low of 0.5% for the third consecutive month recently.  How are mortgage rates reacting to this news?  You would expect them to fall.  But, you’d be wrong.  Mortgage rates are actually rising. 

 

A few weeks ago Abbey had five year fixed rates at or around 4.5%.  Now their rates start at 4.69% for five year fixed rates.

 

So, is it worth buying a variable rate?  Well on the face of it you would think so.  The Furness Building Society have a competitive lifetime tracker with a current rate payable of 3.19%.  (BoE Base Rate + 2.69%).  The rate payable is among the lowest available for any deal.  Short term fixed rates are now at 3.8% with longer term creeping above 4.5%. 

 

If we assume that you can afford to take the risk with a variable rate mortgage then when compared to a short term fixed I would argue a variable rate is better value.  Analysts predict rates won’t rise for another year or more.  Therefore, if rates do rise at that time they would have to rise considerably to make the fixed rate more attractive over 2 years.

 

If we assume over the longer term that the BoE Base Rate returns to it’s more normal realms of 5% then the Furness Building Society variable rate deal would have a pay rate of 7.69%.  It could be argued that rates are more likely to revert to “normality” over a 3-5 year period so a 5 or even 10 year fixed rate paying 4.5-5% looks extremely attractive when compared to a variable rate mortgage. 

 

I would suggest therefore that you should pay more attention to variable rate mortgages over short periods and be more aware of fixed rate mortgages for tie-in periods in excess of 4 years.  The security of payments over a longer period will be valuable as interest rates begin to rise as we enter 2010 and beyond. 

 

Of course, everybody’s situation is different.  You should seek advice from an Independent Financial Adviser (IFA) before you choose a mortgage product.  An IFA will recommend the most appropriate product for you.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, adam@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin CertPFS

13th June 2009