Think before rushing into a fixed rate mortgage deal

Lenders were last week branded “unfair” for raising the cost of mortgages even though the rates at which they lend to each other in the money markets have dropped to record lows.

Brokers said fixed rates have gone up so much that borrowers could be better off with trackers — although Bank rate is likely to head up in the medium term.

In the past month, the average five-year fixed-rate mortgage has gone up 0.48 percentage points to 6.15%, according to data firm Moneyfacts, while the cost of funding fixes in the money markets has fallen by about 0.32 points.

Northern Rock, the government-backed bank, recently increased its five-year fix for someone with a 35% deposit by a hefty 0.6 points to 5.89%. Fixed rates are now at their highest levels for about 20 years relative to Bank rate (0.5%). Meanwhile, Libor (the London interbank rate), a benchmark for tracker rates, fell to below 1% last week for the first time since 1986.

However, the average two-year tracker has increased from 3.86% to 3.91% in the past fortnight, comparison site Moneysupermarket reported. Over three months, the average two-year tracker has jumped from 3.66% to 3.74%.

Louise Cuming at Moneysupermarket, said: “Banks and building societies are benefiting from the lowest borrowing rates for two decades but this isn’t being passed on to consumers.”

The Council of Mortgage Lenders defended providers last week, saying that wholesale rates were not a true reflection of lenders’ costs.

However, brokers said pressures in the credit markets had eased considerably in recent weeks.

Ray Boulger, senior technical manager at broker John Charcol, said that as the Bank rate is likely to stay low for two to three years, borrowers might do better with a tracker deal than a five-year fix.

“The premium you have to pay for a fixed rate for five years or longer, compared with the initial rate on a tracker, has risen to well over 2 percentage points, which looks too much with the current outlook for interest rates.

“Too much of the anticipated rise in interest rates is factored into fixed rates.”

He recommends HSBC’s lifetime tracker with no early repayment charges, meaning you can switch into a fix in future without penalty. The rate is 2.24 points above Bank rate for the term, or 2.74% now, with a 40% deposit and £999 arrangement fee.

The best five-year fix, also from HSBC, is at 4.79%. Someone on a £200,000 interest-only mortgage would pay £798 on the fix but only £457 on the tracker — a saving of £4,092 a year — and Bank rate would have to rise to 2.5% for them to be better off with the fix.