Experts are warning that savers and borrowers who plump for fixed-rate deals could lose out.
Cash Isa rates have broken through 5% for the first time in a year, but Moneyfacts, the data firm, cautioned last week that income-hungry savers could be lest worse off if they lock in.
Although Bank rate was held at 0.5% last Thursday — marking exactly two years since it was first reduced to this record low — the financial markets are expecting it to rise in May. This means savers who tie up their money now could miss out on future increases.
Also, while more borrowers are opting for fixed-rate mortgages, brokers said they are paying an unnecessary premium and could be better off staying on a variable rate.
Someone on a tracker who saw their mortgage rate plummet in March 2009, but kept overpaying could have paid off almost £9,000 more over the past two years than a borrower who simply pocketed the fall in monthly payments, according to figures from London & Country Mortgages (L&C), the broker.
Advertisement
Savers
Savers, who have been hammered by two years of pitiful rates, have seemingly been offered a lifeline in recent days.
Skipton building society now boasts a five-year fixed-rate cash Isa paying 5% a year. This is the first time savers have been able to get a 5% tax-free return since March 2010, according to Moneysupermarket, the comparison site.
Also, the AA launched a five-year fixed-rate taxed account paying 5% last week, which means higher-rate taxpayers would get a net return of 3% and basic-rate payers 4%.
However, the rates on variable savings accounts have also risen in recent weeks and are now a more compelling option, according to Moneyfacts. For instance, you can get returns of 3.35% on an instant-access Isa from the AA and the rate will also rise when Bank rate does.
Michelle Slade at Moneyfacts said: “We have found that most savers prefer to tie up their money only over the shorter term. While longer-term fixed deals may pay highly competitive rates now, they may be less competitive later when Bank rate rises.
Advertisement
“Variable rates pay slightly lower rates now but savers will benefit almost straightaway from Bank rate rises when they happen.”
Borrowers
Homebuyers have flocked to fixed-rate mortgages in recent months as expectations have grown that Bank rate will rise this year. Some 53% of all borrowers took out a fixed-rate mortgage in December and the figure in January was 52%, according to the Council of Mortgage Lenders.
Advertisement
The rates on fixed mortgages have increased by almost a full percentage point since the start of the year. The lowest-ever rate of 3.69% for a five-year fix from Yorkshire building society was pulled at the end of December and the best direct deal available today is from First Direct at 4.59%. However, five-year swap rates, which dictate the cost of such deals, have eased back from a high of 3.23% last month to about 3% today, which means fixed-rate loans could fall in the short term.
Ray Boulger at John Charcol, the broker, said: “It might be worth waiting to see whether fixes come down a bit.
“While some lenders have been putting up rates a little recently, others, such as Woolwich (the lending arm of Barclays) and ING Direct, have been reducing them — whereas a month ago, everyone was putting them up.”
In contrast, Boulger said, the rates on variable loans have remained broadly unchanged, with the best deal currently from HSBC on its lifetime tracker pegged at 1.79 percentage points above Bank rate, so 2.29%. The deal is available to those with a 40% deposit.
He added: “The 2% premium that borrowers must pay for the security of a five-year fix looks too high. The two percentage-point difference between the best five-year fixes and the best variable rates means that Bank rate will have to average more than 2.5% over the next five years for the fixed rate to prove cheaper.”
Advertisement
Experts said that borrowers could take advantage of the current low Bank rate by having a variable rate mortgage but overpaying to reflect the amount you would have to pay for a five-year fixed rate. David Hollingworth at L&C said: “Some mortgage borrowers will have enjoyed a record low Bank rate for 24 months. Bank rate had been at 5% only a matter of months before and so simply maintaining monthly payments at that level, assuming adequate flexibility, would have made serious inroads into the outstanding mortgage balance.”
For example, in September 2008, HSBC offered a lifetime tracker at 0.79% above Bank rate, with no early repayment charges at any time — so borrowers will have been paying 1.29% since March 2009. A £150,000 mortgage over 25 years would cost £947 a month at a rate of 5.79% and £585 a month at 1.29%.
L&C said a borrower that continued to make monthly payments at the 5.79% level would have paid off £8,798 more over two years than a borrower that elected to pocket the fall in monthly payments.
Tracker lets us overpay
Moira Taylor-Kielty, of Malmesbury, Wiltshire, has stuck with tracker mortgages to take advantage of low interest rates. The 46-year-old special needs teacher found a tracker from Principality building society at 2.79% through London & Country Mortgages, the broker, and overpays by a few hundred pounds a month.
She said: “We’ve been overpaying on variable mortgages for several years, meaning we have been able to pay off a sizable chunk of the loan. It also means we won’t get a shock when interest rates rise.” Taylor-Kielty is pictured with her husband Simon, 47, an illustrator, and their son Patrick, 9.
Advertisement
