Why your mortage could soon rise

Don't get complacent. Your mortgage could rise sooner than you think. For some time we've got used to the idea that UK's economic problems, twinned to Europe's wider debt calamity, meant the Bank of England would sit on interest rates more or less indefinitely. But new mortgage rates are also affected by Libor rates, now rising sharply. That's bad news for some new mortgage deals.


Only way is up?

Let's look closer at the rate at which banks lend to each other. This is the London Inter-Bank Offered Rate, or Libor. Recently it hit 0.99%, a height not seen since July 2009. When this rate rises higher - disproportionately to the base rate (0.5%) - that signals fear, or a lack of lending confidence.

Which impacts on deals offered. Currently, some new fixed rates look impressive: 1.99% for two years from the Leeds Building Society; or how about a five-year fix at 3.8% from HSBC? These deals (though some come with horrendous fees attached) could be easily pulled if confidence worsens.

And a new Bank of England Trends in Lending report does claim UK mortgage rates will rise in the next months if the international wholesale markets remain panicked.

Future shock

Stay calm. The government does not want to see house price confidence slip. So we're unlikely to see huge interest rate shocks in future. But given the perilous state of consumer confidence, small upwards rate changes will make a difference, not just materially but psychologically.

Anyone with a £150,000 mortgage spread over 20 years at, say, 4% interest, will currently pay around £919 a month. An 0.5% interest hike to 4.5% will push repayments to £960. Quite a leap. Bigger leaps don't bear thinking about it. (Oh, alright: push that rate higher to 5% and your repayments climb to more than £1003.)

Yes, the percentage rate rise is much smaller than recent utility bill prices rises. But mortgage costs are much higher than utility bills costs for most people.

Fix yourself up?

If you're remortgaging or a new buyer, it might pay you to look at a fixed rate deal, preferably locking in for a bit of a stretch i.e. more than two years and possible five-plus. If you're put off this idea, you might consider a lifetime tracker, so you can switch to a fixed deal when the time's right.

However Ray Boulger from Charcol mortgage brokers says tracker rates have been creeping up recently. "Tracker and variable rates are affected by the Libor rate and a number of lenders have put their tracker rates up - a reflection that money is tight."

Unless you're borrowing huge amounts of money - £500,000 for example - Boulger suggests giving the rock-bottom 2% deals a swerve and looking at a five-year fix, some of which can still be had still at around the 3.5% mark.

Hybrid deal

Or look at a hybrid deal where you have a tracker rate for the first two years, then a fixed rate of 3.49% - already agreed - for the last three years. Available through Accord, a subsidiary of RBS.

If you're a new buyer or you're about to remortgage, it might be time to get yourself a deal, sharpish.
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