Low interest rates have been good news for home owners. Fixing a mortgage rate at a low level has been particularly tempting, prompting borrowers to fill their boots. But is jumping on the fixed rate bandwagon the answer? As the name suggests, fixed rate mortgages set the rate of interest for an agreed period - say, two, five or ten years. They traditionally appeal to borrowers who like the certainty of a static monthly payment. But if your fixed rate mortgage carries what is known as an extended redemption tie-in then you could be stuck with your lender's lousy standard variable interest rate for some time after the fixed period ends, making it a false economy (visit Yahoo's mortgage centre to compare 1000s of mortgages).
With base rate reaching record lows, the take-up of fixed rate mortgages has more than doubled in the last year. Figures from the Council of Mortgage Lenders (CML) show that in July 2003 alone, 55% of home loans were fixed rate - the highest on record. The average fixed rate was 4.12% against an average 3.96% variable rate.
"Beneath the surface the fixed rate market has been going haywire," says Ray Boulger of Charcol. "Lenders have been withdrawing deals and either repricing them upwards or not replacing them at all. The reason that we are seeing a sharp increase in fixed rates is a reaction to activity in the US. The rate on 30 year US fixed rate mortgages increased by over 20% from 4.9% to more than 6% in just six weeks"
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Despite, this, the American dream may soon be a reality in the UK. In the Spring budget the Chancellor commissioned research on how the UK 'can develop a market for long-term fixed rates'. He wants the UK to take advantage of the same type of 25 and 30 year fixed rate loans which are popular in the US and other parts of Europe.
Michael Coogan, Director General of the CML is unconvinced: "It is unlikely that the market can deliver long-term fixed-rate mortgage products that are attractive to UK consumers, as the Chancellor of the Exchequer has advocated, without the introduction of significant Government incentives to encourage borrowers to take them out."
Leeds & Holbeck Building Society tested the water in May 2003 when it launched a 25 year mortgage with the rate fixed at 5.6%. It has since been withdrawn. Northern Rock, along with two major European banks are said to be offering support to the idea of setting up a European Mortgage Finance Agency to promote 30-year fixed rate loans without early redemption penalties. 'But the proposed interest rates of 6.5 to 7% - are just too high-priced,' says David Bitner of The MarketPlace, Bradford & Bingley. 'Borrowing £100,000 on a repayment basis over 25 years on a fixed rate of 7% for the life of the loan would mean paying £706.78 per month. Compare that to a life time tracker at 0.5% above the Bank of England base rate where they would be paying just £541.74 per month, it become startlingly clear what a borrower would opt for,' he adds.
But that is not the end of the debate. According to Building Societies Association statistics, over the last 25 years the average building society mortgage rate has been 10.1%, with this rate rising as high as 15.25% in 1990. Some might say we've never had it so good.
