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Borrowers should not get themselves in a fix

As lenders fall over themselves to pull, reissue and reprice their fixed rate offerings in the wake of the recent interest rate rise it’s hardly surprising that two themes are emerging.

First is the predictable re-emergence of longer term fixes. Second is the equally predictable increase in lenders’ arrangement fees – a lender’s silver lining to a borrower’s cloud.

Not that increased fees are new – they’ve become a big revenue spinner which lenders have got away with under the guise of product pricing. Our legislators haven’t yet found a realistic way of linking outrageous profiteering with treating customers fairly.

Even two-year fixes are getting a makeover with the cost of acquiring one recently rising by between 100 and 200. And overall, many of the more attractive interest rates now have price tags of about 1,000.

Not that this seems to be deterring punters. With the press and pundits preoccupied with the next rate increase, the preparedness of borrowers to pay a hefty premium for the relative comfort of securing their outgoings for years seems to be outweighing the indignation and upfront pain.

In nearly all cases, the pain can mainly be absorbed within the loan and therefore not felt by family budgets or funded by disposable income. This doesn’t necessarily make fixes good deals – or even sensible ones.

Borrowers tempted to bolt for cover beyond the five-year mark should think long and hard. Although there isn’t a great deal of difference in the interest rates available between two and 10 years, a year is a long time in the mortgage market. What looks like a 10-year lifeline today could be a tether to a millstone in three years’ time. By the time the early repayment charge is added to the upfront arrangement fee, leaping into bed with the wrong rate or term could be a painfully expensive knee-jerk reaction.

Maybe the answer for those who are suddenly finding the cost of shouldering their mortgage too great a load to bear does not rest with diving into a fixed rate.

If borrowers are unable to cope with a 0.75% rise in repayments they should consider whether their capital sum is too large. There will certainly be some for whom trading down is more sensible.

But then, when it comes to owning homes, we tend not to be overly sensible in the UK. We seem to prefer palliatives rather than surgery to eradicate problems.

But painful though things may be now in terms of squeezing the family budget, I can’t help but feel that Alliance & Leicester’s variable rate at 4.94% represents a far better option than leaping into a fixed rate.

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