Amid rumours of interest rate rises, fixed rate mortgages are being snapped up fast

Amid rumours of interest rate rises, fixed rate mortgages are being snapped up fast

There are whispers and murmurings that the record low interest rates could be coming to an end.

In the corridors of the Bank of England and around the city analyst desks many are speculatingabout the potential fall-out of an interest rate rise.

The last increase in the Bank of England interest rates was in 2007, yes 2007, three years ago. It’s amazing to think that even though interest rates have been talked about every day and month they have actually being falling.

January 2007 was the last time the Bank of England base rate went up, the quarter of a percent increase from 5.25% to 5.50% immediately reduced the amount of deals available within the mortgage markets.

Overnight over 12 lenders removed their fixed rate mortgage offers from the market. They claimed this was down to overwhelming demand from borrowers wanting to fix their mortgage as there was a fear that interest rates were going to exceed 6%. By July 2007 interest rates were at 5.75% with talk of further increases sparking further demand for fixed rate mortgages.

So here we are again, this time it’s February 2011, interest rates are at a record low of 0.5% and the mortgage market is ripe with attractive fixed rate mortgage deals.  With talk of an interest rate rise this year, borrowers have started to look at the lenders’ fixed rate menus. Even though many borrowers who have tracker and standard variable rate mortgages have had the luxury of seeing their payments drop over the last two years, many are seeing the benefits of long term fixing.

This trend is supported by the Council of Mortgage Lenders, which found that 48% of new borrowers took out a fixed rate mortgage in the second half of 2010. With a growing trend for longer fixed terms borrowers are looking beyond 2 year deals.

However, this growing trend and demand has put additional pressure on lenders to review the deals available on their happy hour mortgage menus with many concluding to end the happy hour rates by either starting to withdraw their fixed deals or by increasing the rates or the criteria at which they are offered. Many of the best fixed rate deals now require borrowers to have loan to value rate of 60% when the average loan to value rate in the mortgage market is around the 70% mark.

Halifax was first to close its mortgage bar, with First Direct and Yorkshire Building Society following in January. It seems that the lenders have learnt from their previous mistiming in 2007 and are clearly thinking ahead and preparing for an interest rate rise.

It could be also said that that this time around first time buyers and remortgagers have seen the light and are no more opting for risky interest only options. However, this is where the problem lays, the demand for fixed rate deals and borrower’s expectations are totally mismatched.

My advice is to be realistic when looking at a fixed rate deal anything between 2.5% and 5.6% is a great rate if you can pin the lenders down. As each week closer to an interest rate rise results in an increase in fixed rate percentages and fees.

So the question is how much time do borrowers have left? I would say not long considering the time to takes to find a property and secure a mortgage. Personally, I opted for a long term 5 year fixed rate during the last fixed rate scramble and have never looked back. But if I was at the mortgage bar right now I would be looking at the following menu of lenders:

2 Year Fixed rates

Santander, 2yrs at 2.65% (£1995 fee)

ING, 2yrs at 3.49% (£945 fee)

Principality,  2 yrs at 3.99% (no fee)

4 Year Fixed rates

Principality, 4 yrs at 4.89% (£999 fee)

Woolwich, 4yrs at 5.49% (£999 fee)

5 Year Fixed rates

ING, 5yrs at 5.09% (£195 fee)

HSBC, 5yrs at 5.59% (£999 fee)