A quick fix could be path to best value mortgage

HOMEOWNERS sitting on cheap variable rate mortgages have been urged to consider opting for long-term security as lenders launch the most competitive five-year deals on record. Several banks and building societies have slashed their remortgage costs in recent days in a bid to lure borrowers off the fence and into the fixed deals that give lenders greater security of revenue.

However their efforts to kick-start a moribund remortgage market are targeted almost exclusively at borrowers with significant equity in their homes already. Most homeowners with more than 80 per cent of their loan to repay remain better off on the standard variable rates (SVRs) to which they borrowers are shifted when their fixed deals expire.

Cheap SVRs are the main reason why the latest Council of Mortgage Lenders figures show remortgaging levels at their lowest for a decade, despite moves by some lenders, including those under the Lloyds Banking Group umbrella, to make them less attractive.

Banks and building societies are now responding by slashing their tracker and fixed rate costs. New Bank of England figures show that the average tracker cost fell for the third successive month in October to a record low of 3.5 per cent. They also revealed that the average two-year fixed rate mortgage for borrowers with a deposit or equity of 25 per cent is now at its lowest level since records began 15 years ago, at 3.75 per cent.

However the greatest competition has been on five-year fixed rate mortgages, as lenders seek to exploit interest rate uncertainty and tie borrowers into longer term deals.

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The average five-year fixed rate dropped by 0.19 per cent last month to 4.85 per cent and new cuts in the last few days mean five-year deals are now the most competitive they have ever been, according to Melanie Bien, director at mortgage broker Private Finance.

"Five-year fixes still remain a better option than shorter-term deals because of the expectation that interest rates will be higher just when you come to remortgage if you opt for a two-year deal," she said.

The banks slashing their five-year costs in recent weeks include RBS/NatWest, which has launched a fixed deal at 3.75 per cent with a 699 fee. The significant sticking point is that it's available only to borrowers with at least 50 per cent equity in their home. ING and First Direct also have sub-4 per cent rates on five-year deals, with rumours that the former is set to unveil a new lower rate.

"With rates like these, borrowers may as well remortgage sooner rather than later - and save money on their monthly payments," said Bien.

The growing appeal of five-year fixes has also been noted by David Morrans, director of Honour Financial Planning in Edinburgh."Most people who took out a mortgage in the last few years would have done so when the base rate was around 5 per cent, which is around the normal long term trend. The opportunity to fix long term at under 5 per cent is too good to miss," he said.

There are other factors in favour of tying into a fixed rate deal, although the suitability varies with borrower. They include growing uncertainty, as the axe falls on thousands of Scottish public sector jobs and the government's austerity measures start kicking in, and the impact of falling house prices.

Ray Boulger, of broker John Charcol, who reported a marked increase in remortgage applications of late, said: "If you're near one of the LTV thresholds, such as 75 per cent, and you expect prices to fall, it's an argument to do something sooner rather than later."

Then there's the interest rate dilemma. Borrowers expecting them to rise sooner rather than later may feel it's time to move to a fixed rate deal.

Morrans said: "With commodity prices going absolutely parabolic, it is only a matter of time until this rears its ugly head and high inflation means higher interest rates. If you don't like risk, and maybe think the government and central bankers actually don't have all this under control, you should perhaps act now." Boulger argued that if interest rates increases are the primary motivation for fixing, now is still too soon, with no hike expected over the coming months.

However he pointed out that other factors will play a bigger part, such as the borrower's current rate, the amount of equity they have in their home and the quality of their credit record.

Homeowners most likely to benefit from moving to a fixed rate are those with at least 25 per cent equity in their property and a current SVR of more than 3.5 per cent.

Switching from an SVR to a fixed rate is less beneficial for borrowers with less than 25 per cent equity, with costs significantly higher, but this also depends on the SVR level. While most borrowers with Lloyds TSB and Cheltenham & Gloucester - both part of Lloyds Banking Group - and Nationwide currently benefit from sub-3 per cent rates, many more, including RBS and Bank of Scotland borrowers, are paying 4 per cent or more.

"The less equity you have, the less worthwhile it is moving to a fixed deal," said Boulger. "But if you are on an SVR as high as 5 per cent or more, clearly it's worth considering."