Act now to fix your mortgage rate

Are you scared yet? If you aren’t, you should be. Why? According to The Times, “normal service” is being resumed in the mortgage market. That means there are now over 10,000 different mortgages on the market to choose from – up 33% on last year, and the highest since the bust in 2008.

It means, says the Financial Times, that the self-employed are finding it easier to get home loans as “lenders ease their criteria”. It means the average asking price for a house in the UK is at a five-year high (not selling prices, asking prices). And it means interest-only mortgages are back.

Yes, five years after the financial crisis appeared to prove once and for all that lending people money when they don’t even pretend to be able to repay is a bad idea. The Guardian tells us that the Clydesdale and Yorkshire banks are both to make interest-only deals available under what they call “low start”.

The idea is that borrowers pay interest only for three years, then move to repayment. Is this a good idea? We doubt it. It might work in a world in which the starting interest rate was based on a normal base rate rather than an emergency one, and when real (inflation-adjusted) wages were rising across the board. But in a world in which rates have to rise at least 2.5 percentage points to even match inflation, and real wages have fallen 5.5% in the last five years? No. What happens to low starters in three years when rates have doubled, their repayments have tripled and their salaries haven’t budged? This is not the right kind of ‘normal service’.

On the plus side, the mortgage pricing war is good news for those determined to buy a house or those with equity who want to remortgage. That’s because fixed-rate mortgages are now ridiculously cheap. It might be that interest rates in the UK really don’t rise until 2016 or 2017, and that borrowers may be marginally better off with tracker mortgages as a result. But with the average five-year fixed rate now a mere 3.86% (plus fees), why take the risk?

The cheapest deal for those with a 25% deposit at the moment is Virgin’s five-year fix. It costs 3.19% a year, with a £995 upfront fee (given that the average standard variable rate is over 4%, this is very cheap indeed). But if you have a 35% deposit, the Yorkshire building society can go a good deal better – 2.44% with a £1,475 fee. That’s no higher than most discount or tracker offers.

Finally, don’t forget that ten-year fixed offers now exist in Britain. They aren’t for everyone – as The Sunday Times notes, you can get stuck with huge exit fees if you try to get out before the end of your term. But if you have a 25% deposit and plan to have the same loan for a decade, you can get a ten-year fixed rate from Norwich & Peterborough for just 3.84%. That’s a genuinely good price.

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