Rates on new mortgages are expected to march up this year, despite Bank of England governor Mark Carney's pledge to peg the base rate at 0.5% until 2015 or beyond.
First-time buyers and people wanting to remortgage are being warned to act now to secure the best deal. "The danger of headlines such as 'Low mortgage rates for years' is that it can lull some borrowers into a false sense of security," says Stuart Gregory of Lentune Mortgage Consultancy. "Waiting until the base rate finally starts to rise could see some borrowers missing the excellent longer-term fixed rates currently available."
Yorkshire building society, which had one of the best five-year deals on the market, at 2.84%, has repriced upwards to 2.99%, and other lenders are expected to follow. Ray Boulger of broker John Charcol said: "In the five-year fixed-rate market, the trend has basically been one way – upwards."
Last week the Bank indicated the base rate would stay at its historic low of 0.5% until at least 2015, bringing relief to those on tracker mortgages and other deals linked to it. However, other rates are set at lenders' discretion, including many standard variable rates for existing customers, and new deals for customers who are buying or remortgaging.
Behind the predictions are a cocktail of factors making borrowing more expensive – even if Carney keeps a lid on the base rate. Funding for Lending – the government's flagship scheme to encourage banks to lend more – has helped finance billions of pounds worth of mortgages. But it was partially withdrawn at the end of January, with the government aiming to divert lending to small business rather than households.
Meanwhile, April will see the start of tighter lending criteria, as the long-awaited Mortgage Market Review (see box) comes into force.
Howard Archer, chief UK economist at IHS Global Insight, believes mortgage rates "could start edging up as the year progresses", while Matthew Pointon, property economist at Capital Economics, says any move in the cost of new fixed-rate mortgages is likely to be upwards. "While fixed rates will remain very low compared to the past, they are likely to drift up over the coming year," he says.
According to the Bank of England, the average cost of a five-year fixed-rate mortgage on a 95% loan moved up slightly in January, to 5.44%, but at 75% loan to value (LTV) it remained steady at 3.36%. And lower rates are still available over that term, says David Hollingworth of mortgage broker London & Country. "The best rates are still a touch below 3%," he says. "For example, Natwest and Woolwich offer 2.95% to 60% LTV with a £995 and £999 fee respectively and both offer free valuations and legal work for remortgagers."
On two-year fixed-rate deals there have been few changes, and buyers can find rates below 2% if they have a deposit of at least 30%. Tesco bucked the trend by putting up some of its two-year fixed rates at the same time as cutting the cost of its five-year fixes, but it still has two two-year deals priced at 1.64% and 1.99%, at maximum loans to value of 60% and 70% respectively. While these deals might bring lower monthly repayments than five-year fixes, it is worth bearing in mind that you could find yourself shopping round for your next mortgage at a time when rates have started to rise across the market.
Last year the regulator, the Financial Conduct Authority, warned lenders that they needed to be careful about increasing their standard variable rates, and to ensure that if they did so they treated customers fairly. The warning came after Bank of Ireland and West Bromwich building society both announced they would increase margins on their tracker rates, putting up monthly costs for thousands of existing customers. Only a brave lender would decide to increase margins for existing customers, but new borrowers may start to see higher priced tracker and discount loans.
Brokers said those sitting on cheap deals linked to the base rate could take comfort from the Bank's words, but should still plan ahead. Hollingworth said: "They, too, can take action now. Making overpayments whilst rates remain at this low will reduce the mortgage balance more rapidly and make life easier when rates do start to climb."
