Fixed rate mortgages point to higher interest rates

Interest rates were kept on hold at 5% by the Bank of England last week, however fixed rate mortgages are now costing more than variable mortgages, indicating interest rate rises may be on the way.

Leading mortgage lenders employ economists and financial analysts to predict the future of interest rates with as much accuracy as possible. These predictions are crucial as the lender must price their products correctly, particularly fixed rate mortgages.

The rates of fixed rate mortgages over different terms therefore provides an insight into the lenders predictions for the future of interest rates.

For example, if the rates for two year fixed rate mortgages are lower than three year fixed rate products, then it is highly likely that interest rates are predicted to fall in the short term and then increase in the mid term.

Similarly if a three or five year fixed mortgage rate is lower than the two year fixed, then you can assume that rates are set to increase soon, but then decrease in the next three years or more.

The latter example seems to be occurring in the mortgage market now – indicating the gloomy news that interest rates are likely to rise soon.

For those who can offer a 25% deposit, the Nationwide is currently offering a two year fixed rate mortgage for 6.65%, decreasing to 6.25% if you are prepared to pay a £599 mortgage arrangement fee.

In contrast, a three year fixed rate mortgage at Nationwide is priced at 6.05%. Although it carries the £599 arrange fee, it clearly indicates that Nationwide see mid term interest rates falling, albeit slightly.

Nationwide’s variable base mortgage rate is currently 6.49%, slightly less than their two year fixed rate mortgage.

So if the mortgage lenders are preparing for interest rates to increase, then so should you. If you are in a position to move to a new home then now is the time to finalise your mortgage before rates creep up again.

Lenders requiring larger deposits

One thing to note when applying for a mortgage is that the days of 100% loans are numbered. Only five lenders now offer 100% mortgages, whereas 30 lenders will be prepared to loan 95% of the value of your property.

The mortgage rates that we mentioned above apply when the borrower can offer a 25% deposit, or more. Interest rates and arrangement fees escalate as your deposit decreases.

For example, the Nationwide charges 6.85% for a two year fixed rate mortgage if you only provide a 10% deposit, compared to 6.65% for those offering 25% of the property value.

So whilst securing a mortgage is more difficult at the moment, the best deals are only offered to borrowers with larger deposits.

It is also becoming more likely that the next change of interest rates will be a move upwards, putting further pressure on beleaguered home owners and buyers.