Cost of fixed-rate mortgages on the up

Published on Friday 12 June 2009 20:14

BORROWERS looking for cheap fixed-rate mortgage deals have been urged to act soon before costs begin to soar.

A number of lenders have increased their fixed-rate mortgages in recent days in response to a steep rise in the cost of wholesale borrowing, which is used to fund mortgage lending.

Cheltenham & Gloucester (which is owned by Lloyds Banking Group), Northern Rock, and the Principality and Nationwide building societies have all raised the cost of their fixed-rate mortgages in the past few days.

Nationwide increased some fixed rates by up to 0.86 points, pushing its five-year fix to 5.64 per cent.

Other lenders are expected to follow suit in the coming days.

The changes follow a rise in two-year swap rates, on which two-year fixed-rate deals are based, over the past fortnight.

But figures from Moneyfacts show that the margin between the swap rate and the average two-year fixed rate has doubled in the past year. The difference is now 2.27 per cent, up from 0.82 per cent last summer.

Louise Cuming, head of mortgages at the comparison site moneysupermarket.com, said that borrowers waiting for the fall in fixed-rate mortgages to bottom out should act quickly.

"The rising swap rate means banks will be charging each other that little bit more for credit, and they are unlikely to let consumers continue to enjoy lower rates for long," she explained.

"Our data shows this is already affecting two-year fixed-rate deals, which have risen slightly over the past six months."

Interest rate cuts by the Bank of England have helped reduce the cost of fixed-rate mortgages over the past year. The average best-buy two-year fixed-rate deal is currently 3.62 per cent, compared with 6.30 per cent a year ago, according to Moneyfacts. Similarly, the top three-year deal is now 4.09 per cent, down from 6.23 per cent in June 2008.

Cuming advised borrowers looking for a fixed-rate deal to find one soon before costs increase further.

"Borrowers might also consider fixing for a longer period of time, say up to five years," she said. "If the base rate climbs back to mid-2008 levels, fixed-rate deals might be going up for some time."