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In the fixed rate war make sure you're a winner
by Sarah Modlock
'We are now in the throes of a fixed rate war,' declares Duncan Pownall, fearless mortgage development manager at Bradford & Bingley. You could say there is no rest for the wicked as the all financial eyes remain on the economy and rates during the summer.
Over the past few weeks we have seen fixed rates drop a number times with the 'big two' Nationwide and Halifax battling it out in the blue and red corners. Their two-year fixed rates are now priced at 4.39% and 4.29% respectively. Spurred into action, Alliance & Leicester has also entered the fray with a two-year deal at 4.24% and most recently Newcastle has launched a two-year product at 4.22%. This rate currently leads the market, but for how long?
'Lenders are clearly desperate to try and retain customers, especially those coming off cheap fix rates from two years ago, so are devising better deals to keep them,' Pownall explains. 'Nationwide in particular has been aggressive in its fixed rate pricing this year maintaining its market share and provoking others into action.' But it is not just a simple case of pouncing on the lowest deal. 'Despite their allure it is crucial that borrowers aren't tempted by the headline rate alone,' Pownall advises. 'Remember that whilst these rates do look attractive, some sport fairly hefty arrangement fees, not always ideal for those with smaller loans. The Halifax 4.29% product, for example, costs £599 whilst Nationwide charges up to £484 in fees to remortgage onto their 4.39% fix. This could make switching over to a new fixed rate deal an expensive business for borrowers.'
Some providers though, do cater for both sides of the market. Alliance & Leicester, for instance, has a two-year fix at 4.59% which has no fees. Similarly Nationwide is offering 4.79% with no fees for purchasers and a £95 admin fee for remortgagers. It is in this environment that seeking financial advice is vital to ensure that borrowers really do get the best overall deal for their circumstances.
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In the battle for market share, lenders are now designing other features to entice borrowers. Abbey, for example, is offering a two-year fixed rate at 4.49% with no tie-ins. With the increase in fixed rate costs for lenders, some great tracker and discount products emerge. The launch of Abbey's tracker at 4.59%, base rate 0.16% signifies the start of tracker products below base rate. These could prove popular with those borrowers who don't need the security of a fixed rate and if base rate does fall they could reap the benefits of even cheaper monthly payments.
'It will be interesting to see if other lenders can be as aggressive in their pricing as the current crop,' says Pownall.
Take action or lose thousands
The present fixed rate war though is great news for the 800,000 potential remortgagers who have either come off or are about to come off the cheap two-year fixes this year. Despite this, figures from the Council of Mortgage Lenders (CML) show that remortgage levels continue to drop - falling in June for the sixth consecutive month. The numbers are also considerably down on last year. Given the payment shock that many borrowers will be facing - jumping from rates as low as 3.3% to around 6.5% - this apathy is somewhat puzzling and could mean they are paying thousands of pounds more a year than they need to.
On a £100k repayment mortgage, for instance, borrowers who slip onto their lender's standard variable rate (SVR) - typical rate of 6.5% - could be wasting up to £1,800 a year than if they remortgaged onto a market-leading tracker. On a £200k repayment mortgage, they could be wasting over £3,500 a year.
During the Spring and Summer of 2003, two-year fixed rates were priced between 3 and 4%, in some cases lower than their discount and tracker counterparts. Such low rates, combined with the added security, triggered a flurry of borrowers to take them out. Now though, as these borrowers come off or near the end of their cheap fixed rate period, they will find the economic climate, following five base rate rises, very different. All mortgage rates have risen dramatically. While the MPC did in fact cut base rate last week by a quarter of a per cent, lenders' SVRs remain comparatively high, now typically around 6.5%.
For those borrowers who had been enjoying interest rates of around 3.5%, such a rate hike will undoubtedly come as a jolt. While a number of borrowers' cheap two-year fixed rates are not due to finish until August, there are still a great many borrowers who will already be feeling the pinch of their interest rates reverting to their lender's SVRs. So the remortgaging slump is a mystery and one which could cost homeowners a small fortune.
It may not appeal to put down the Pimms and turn your attention to pounds and pence in the height of summer but taking time to line up your next mortgage deal could save you enough cash - and a good reason - to party through the rest of the year.
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