Ballooning interest rates split brokers

Mortgage rates could be heading towards 8% by 2001 following the Bank of England's decision to increase base rates for the first time in 15 months.

Should homebuyers now be taking out five-year fixes - currently around 6.3% - to sidestep the pain of rising rates, or opt for a short-term discount at around 5.2% and keep fingers crossed that rates won't rise too sharply?

Nobody believes this week's increase will be the last, with the money markets pencilling in a rise in base rates to 6% during 2000 and a peak of around 6.5% by 2001. Halifax housing market economist Martin Ellis says: "We expect base rates to rise to 6% next year, which suggests a typical mortgage rate of around 7.5-7.6%. Rates could go up in 2001 to 6.5%, putting mortgage rates at around 8%."

For a ?100,000 mortgage, an 8% standard rate works out as an extra ?60 per month on top of the ?688 charged until this week.

Almost no new homebuyers go straight on to a variable rate, and instead choose between either a fixed rate or discount deals. Earlier this year fixed-rate loans were overtaken in the popularity stakes by discounts. But they could regain their popularity with the prospect of an 8% standard variable rate.

But a Jobs & Money straw poll of mortgage brokers found the experts divided: half are recommending that homebuyers take out fixes, and half say you should take a discount loan.

Simon Tyler, Chase de Vere Mortgages: "Fixes are not as attractive as they were in January, when you could find a 5-year peg for 4.99%. Now you are looking at over 6%, with the 6.3% deal from Abbey National the most competitive at the moment.

"For years, when rates were heading downwards, people got used to fixes being below the standard variable rate. Now if you want peace of mind you are going to have to pay a premium for it."

For a shorter-term fix, he recommends Bristol & West and Portman Building Society which are offering two-year deals between 4.5-4.9%, but with "overhang" penalties beyond the end of the discount period. Note that fixed deals tend to come with arrangement fees of around ?300.

Ray Boulger, John Charcol: "If you want a five-year fix, you should grab one of the 6.3% deals now, as they are loss-leaders because they are priced 0.5% below five-year money in the markets.

"Alternatively, wait another 18 months when fixed rates should start coming down again."

His favourite is a two-year discount deal with no overhangs, which the homeowner then switches into a fix in two years' time. "Nationwide Building Society has a penalty-free two-year 1.2% discount, giving you a pay rate of 5.25%. You will be better off than taking a fix as long as base rates do not rise by more than 1.5%."

Ian Muscat, Millfield Partnership: "Unless you really need the security of a fixed rate, then I think that the discounts on offer at the moment are the best value.

"For a longer-term discount, Abbey National has 1.65% off its standard rate until September 30 2004, which gives you a payrate of 5.2%, although its standard rate will almost certainly rise in the next few days.

"For a shorter-term discount, Halifax has 1.8% off until September 30, 2001, giving a payrate of 5.19% after this week's rise."

Both his recommendations were based on borrowers paying a 10% deposit and both loans have no penalties or overhangs.

Peter Timberlake, Legal & General Mortgage Club: "We are recommending an exclusive deal with Woolwich for a five-year 6.34% fix which includes a ?300 cashback and the ability to pay back up to 10% of the capital every year.

"For a shorter term fix, Birmingham Midshires has a 5.99% deal until August 2002, although it does have overhanging penalties."

9 September 1999
Driven by the fear of bust and boom