Keep your loan on track

IT’S a question playing on many homeowners’ minds: with interest rates expected to rise this year, should they fix their mortgage?

The Bank of England left the official rate of borrowing unchanged for the 22nd consecutive month recently, but faces a dilemma given slowing economic growth and rising inflation. This week’s disappointing GDP data has made a rate rise before the summer unlikely, but a hike this year is still probable and several lenders have hiked their fixed rates on the back of rising swap rates, the rate banks pay to borrow from each other.

Many homeowners have reverted to variable rates as low as 2.5 per cent. Ray Boulger at John Charcol, the mortgage broker, says anyone paying more than 3 per cent with at least 25 per cent equity should consider switching to a better deal, as should anyone paying more than 3.75 per cent with at least 15 per cent equity.

But you need to pay attention: “Lenders are pulling fixes with little or no notice, so it can be difficult to plan ahead,” says Melanie Bien, director of independent mortgage broker Private Finance.

“However, it’s important that borrowers don’t panic. The fragile economic recovery is likely to weigh heavily on rate-setters, who appear keen to delay an increase until at least the second half of the year.”

If you would struggle to repay your mortgage if rates were to rise or have a high loan-to-value and are worried about the impact of falling house prices on your equity (and, therefore, the mortgage deals open to you), fixing soon makes sense.

Remember, you can book a rate up to six months in advance, so this could allow you to enjoy a cheap variable rate for a little longer.

If you’re of the same mindset as the economist Roger Bootle, and believe the bank rate will stay low for some time, then rise slowly, trackers still offer better value, says Boulger.

The Bank of China (UK) has a lifetime tracker at the bank rate plus 1.8 per cent, which is available for up to 80 per cent loan-to-value.

However, David Hollingworth at London & Country Mortgages, says even those who can manage rate increases and believe they will be gradual should consider fixing.

“Even these people may decide it is time to fix in order to play a longer-term game and, certainly, fixed rates are extremely low at the moment,” he says.