Five-year fix for home loans

MORTGAGE bargains are on the cards with the Government likely to cut interest rates in a bid to protect the post-Brexit economy.

But homebuyers seeking security against potential interest rate volatility during the exit negotiations and beyond should be ready to grab a low-cost five-year fixedrate mortgage.

Ray Boulger, mortgage expert at broker John Charcol, says: ‘If you are looking for a mortgage and you want a fixed rate, I would hold off for a week or two as we will see rates fall.’

LENDERS ARE CUTTING RATES

MORTGAGE providers will pay less for the money they lend, says Boulger, because they borrow from the money markets where rates are based on gilt – or Government bond – yields. ‘These fell sharply last week and are 100 basis points below a year ago.’

Some lenders were already cutting rates before the Brexit decision, among them HSBC which launched a two-year fixed-rate mortgage of 0.99 per cent – an all-time low.

The HSBC deal applies on properties worth up to £500,000 for borrowers who have a deposit of at least 35 per cent.

Some borrowers should beware, however. Although the HSBC deal offers a bargain rate, it carries a high arrangement fee of £1,499. This means that those borrowing low amounts – typically £100,000 or less – are better off choosing a loan with a slightly higher interest rate but lower fees.

THE END OF CHEAP MONEY

THE main risk with a two-year fixed-rate loan is that borrowers will need to remortgage just as the divorce from the European Union is completed. About the same time, the Government-backed Funding for Lending Scheme, the programme designed to encourage banks and building societies to boost lending to homebuyers, will also finish – spelling the end of easily available cheap money.

A five-year fixed-rate loan, although more expensive than a two-year deal, gives more certainty during the potential rollercoaster ride for bank base rate over the next two years.

Rachel Springall, expert at financial data scrutineer Moneyfacts, has just taken out a five-year fixed-rate homeloan.

She says: ‘My two-year fixed rate was coming to an end so I signed up for a five-year deal with TSB because I wanted certainty.

‘My partner wanted to go for a two-year deal, but I persuaded him that choosing a five-year arrangement was a better idea. It’s a gamble but I don’t believe cheap five-year fixes are going to last.’

BUY WHILE STOCKS LAST

LENDERS are happy to offer low rates at the moment to pull in the business, says Springall, and she sees competition increasing in the short term, ‘but there will come a point when banks and building societies can’t afford to lend cheaply and will have to raise rates. It could be a case of buying now while stocks last.’

Boulger agrees that there is likely be a rise in the number of keenly priced longer-term fixed-rate loans.

‘I expect some lenders to offer sub-two per cent rates on five-year deals,’ he says, ‘maybe as low as 1.95 per cent. But the best deals will still be for those with big deposits or substantial equity in their home.’

He warns that the best deals already demand the highest fees of up to £2,000 and that will continue.

A FLEXIBLE ALTERNATIVE

FREEBIES such as valuations and legal fees will not be included with cheaper deals, warns Boulger.

He says: ‘People can be blinded by low rates and need to do the sums as to whether paying a higher rate is a better option.’

A flexible alternative for those concerned about potential turbulence but who fear tying themselves in is to choose a discounted two-year deal. Boulger says: ‘The advantage is that if a borrower wants to switch to an alternative deal, there will be no early repayment penalties.’

Some of the best discounted deals are being offered by small lenders. Furness, for example, is offering a two-year deal at 1.4 per cent, a discount of 4.14 per cent on its standard variable rate, for borrowers with at least 30 per cent equity or deposit – though it has a fee of £999.

Nottingham Building Society’s two-year discounted rate home loan is priced at 2.29 per cent, a 3.45 per cent discount, but it is available only to those with a 10 per cent deposit. It has a fee of £499.