MSE News: Are pre-booked mortgages good rate rise shields?

Former_MSE_Guy
Former_MSE_Guy Posts: 1,650
I've been Money Tipped! Newshound! Chutzpah Haggler
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edited 11 August 2021 at 1:10PM in Mortgages & endowments
This is the discussion thread for the following MSE News Story:

"Borrowers worried about rising costs can reserve a fixed deal for up to seven months if they don't want to commit yet ..."

Comments

  • Global_D
    Global_D Posts: 54 Forumite
    edited 21 December 2010 at 6:25PM
    I may be no Maths genius but....

    If I'm paying a 2.5% variable rate now (an example used in the article) and rates rise gradually by up to 2.75% from Spring 2011 to end of 2012.... then by the end of 2012 I will be on 5.25%.

    Most fixed rates for anyone with 90% LTV are generally higher than 5% at present. So if you fix now then you will be paying double your current interest until end of 2012 rather than have your payments gradually increase to about what you would pay if you fix anyway. Added to which is the mortgage fee, the valuation fee and any other fee the bank wants to stitch you up with.

    By my reckoning unless you have a huge amount of equity and can secure a rock bottom rate it is not worth fixing.
    2011 - unsecured debt free :j
    2036 - mortgage free :(
  • JimmyTheWig
    JimmyTheWig Posts: 12,199
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    Global_D - what about Santander customers, for example, who will be on a SVR of 4.24%?

    Also, people need to consider if they could afford their mortgages if rates went up by more than you suggest in the longer term? If not, then maybe a 4 or 5 year fix would be better, even at a higher rate?
  • Global_D
    Global_D Posts: 54 Forumite
    edited 29 December 2010 at 9:39PM
    Jimmy - rather than look at specific mortgage lenders rates I stuck to quoting the figures from the MSE article. I myself am due to come off a fixed deal in June 2011 with HSBC and will revert to an SVR of 3.94% as opposed to the 5.69% I am currently paying so will be saving a considerable amount. Interest rates will have to rise by 1.75% before I am paying my current fixed rate. By not remortgaging I avoid paying any fees and also am free to go elsewhere or remortgage at any time if circumstances change without penalty. So if mortgage rates start rising.... then I could fix. In the meantime I will be paying less and can therefore afford to overpay and reduce my LTV giving me greater buying power in the future.

    A longer fix may be suitable for some people but I just reckon that its false economy in the short term.
    2011 - unsecured debt free :j
    2036 - mortgage free :(
  • I like the idea in some respects as it is one way to hedge against rates rising but personally think that most people would be better off using products in the market that are there for this very reason. As usual it depends on Loan to Value, Personal outlook on rate movements etc etc but there are other options.

    For example, there are lenders offering Tracker Rates which offer the ability to switch to a fixed rate offered by the same lender at any time. The Nationwide call it 'Switch & Fix' , Woolwich (Barclays) have it on some of their deals and there may be others around.

    Main advantage is that you can benefit from the lower rate now knowing you can defer the decision whether to fix or not until a time when it may actually affect you.

    Downside is that you will not know what the rate you can fix at in the future is and it will be dependent on what that lender is offering at the time which may or may not be competitive or better than you can get know. Bear in mind that fixed rates follow swap rates more closely than the Bank of England rate so it does not neccesarily follow that fixed rates will be higher if Base Rate is higher. You will also need to pay an arrangement fee at that time but will not have to pay any early repayment or legal fees etc

    The main product that is suitable for this type of situation is a Capped rate which is variable but will not rise above a certain level.

    e.g. The Coventry have some deals at the moment where you would pay a variable rate of 2.25% which is capped at 3.49% until 2013 so you know it will not go above that level no matter what happens to Base rate.

    Advantage is that you know now what the maximum you will pay is and benefit from low rates now.

    Disadvantages include the fact that you often need to borrowing 65% or less of the property's value to get the best rates (although there is a rate capped at 5.59% available up to 85% of the property value) and most capped rate deals are not available for more than 2-3 years.

    All in all not a bad idea but I would look to do it only after you have explored Switch & Fix and Capped rate options.
    I am an IFA (and boss o' t'swings idst)
    You should note that this site doesn't check my status as an IFA, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
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