Act fast to secure a cheap fix

Two weeks ago, as the price of an average two-year fixed rate mortgage fell to its lowest level since the credit crunch accelerated last year, it appeared that conditions were easing and with Prime Minister Gordon Brown announcing a £1 billion package of measures to breathe life into the housing market, there was even room for optimism.

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However, the extraordinary week that was bookended by the collapse of Lehman Brothers and the planned merger of Lloyds TSB and Halifax Bank of Scotland (HBOS) quickly produced more unease in the market. Fears mounted that the Lloyds-HBOS merger would reduce competition significantly and with a huge jump in Libor rate (that is the rate banks use to lend to each other) it seems it’s only a matter of time before lenders put up mortgage rates once more and begin to tighten their criteria further.

During the tumultuous week, 271 mortgage products were withdrawn from the market and while average rates on two-year fixed and tracker mortgages fell slightly, it appears this is the calm before the storm. Anyone wanting the security of a fixed rate mortgage needs to act quickly as rates are heading back upwards. HSBC, First Direct, Abbey and Woolwich have already confirmed their rates will be rising and others are expected to follow suit.

What deals are available?
If your mortgage deal is coming to an end you should apply for a new one without delay, particularly if you want to remortgage on to a fixed rate. Many mortgage offers remain valid for between three and six months, so you can secure a new rate now even if your current deal doesn’t end until later this year or even early 2009.

First Direct has just increased its fixed rates, but it is still offering the lowest two-year rate at 5.19% (up from 4.99% previously). This product is available for loans up to 80% of the property’s value although the arrangement fee is high at £1,998.

If you are looking for longer term security, Principality Building Society has the leading five-year rate at 5.57% on loans up to 60% with a £999 fee, while Marsden Building Society has the best 10-year fix at 5.64% with a £949 fee for loans up to 65%.

A large deposit is key at the moment and if you don’t have much equity to put down, there is less choice and you will have to pay a much higher mortgage rate. Britannia Building Society has a two-year fix with a rate of 5.74% for loans up to 90% with a £999 fee. If your deposit is less than 10% you will pay even more. Halifax has a five-year fix at 6.15% with a £999 fee that is available for loans up to 95% of the property’s value.

But is now the right time to be fixing your mortgage rate?
Many people like the security a fixed rate offers, particularly at the moment with living costs on the up, but unless you act quickly you may be up against lenders hiking their rates.

The Deputy Governor of the Bank of England, Sir John Gieve, hinted last week that the Bank’s Monetary Policy Committee may soon have room to cut interest rates – a view shared by Nationwide Building Society’s chief economist Fionnuala Earley. In a recent interview with moneysupermarket.com’s site editor, Clare Francis, Earley said she expected rates to be cut before the end of the year, and that Bank rate could fall to 3.5% next year – 1.5 percentage points lower than its current level of 5%. Click here to watch this interview in full.

If interest rates are about to fall, a variable rate mortgage may be more appealing than a fix as you will then benefit from any rate reductions. However, if you opt for a variable rate product you have to be prepared for the fact that your mortgage payments could rise, if the economic environment changes and interest rates move in the opposite direction.

For those who can afford the risk that a variable product rate may increase, Principality Building Society has a two-year discount mortgage with a rate of 5.49% and a £999 arrangement fee that is available for loans up to 60%. However, it is closely matched by the HSBC two-year discount that is available for loans up to 90% with a rate of 5.69% and a lower arrangement fee of £249. Of course discount mortgages are not linked directly to Bank rate and so any change in rate is at the lender’s discretion, although most do pass on interest rate reductions in full.

If you want a guarantee that your rate will fall in line with any change in interest rates, opt for a tracker deal as the rate is set at a fixed margin to Bank rate. Nationwide has a two year tracker that is 0.53 points above Bank rate, giving a current pay rate of 5.53%. This deal is available for loans up to 60% of the property’s value. If you don’t have a 40% deposit to put down, Halifax has a three-year tracker available for loans up to 75% of a property’s value with a rate of 5.69%, while Nationwide offers a two-year tracker up to 90% with a rate of 6.08%. The fees on all these products are £1,999 and they include a free valuation and free legal work for those remortgaging.

Another option is a lifetime tracker – these deals are looking particularly attractive at the moment as the rates are not much higher than those on the leading short-term trackers and yet you don’t have to worry about remortgaging every few years.

Currently, First Direct has the market-leading rate at 5.49% for loans up to 80% with a £999 fee, while HSBC has a lifetime tracker available for loans up to 90% that is 0.79 points above Bank rate, giving a current pay rate of 5.79%. The fee is £599 although anyone remortgaging receives a free valuation and free legal work (the First Direct deal includes free legal work on remortgages).

Have your say: How do you rate your provider? Give feedback on your experience with your savings, loan, credit card or debt solutions provider and help others decide which provider to choose. Can you 'beat the credit crunch' and save as much as some of our other customers? Don't forget to let us know how you get on by posting in our community forum.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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