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Fixes may be a financial dead end for customers

In recent months we have witnessed a mar-ked move towards fixed rate mortgages. This is fast turning into a full-blooded charge.

Backed by the Council of Mortgage Lenders, brokers and lenders have pushed fixed rate products as a safety net to guard against future interest rate hikes.

But in reality, many brokers are leading their clients down a financial dead end.

In the past six months, the Bank of England base rate has gone up three times. Many believe it will go up again in the next few months but that the next 25 basis points rise will be the top of the current cycle.

If this is the case, it is likely that rates will begin to fall again within the next 12 months. As a result, those people tied into fixed rate mortgages could find themselves paying over the odds.

As rates have risen, many mortgage providers have incorporated growing margins into their products. This means borrowers taking up fixed rates are not only having to contend with the possibility of tying themselves into deals that will work against them in the coming months, but also the inflated spreads built into their new products.

As the interest rate cycle approaches its zenith, borrowers should be looking towards variable products with which they can take advantage of the cycle’s downward move when it comes.

Borrowers may have to accept another rise in rates if they take out a variable deal, but in the longer term they will benefit from every cut in rates as it happens.

Clearly, this is not a tactic that will suit every borrower and for some the certainty a fixed rate provides may be more important than risking increasing payments over the short term, no matter what the potential savings are in the longer term.

But as an industry we should not allow a sheep-like mentality to take over and simply believe fixed rate products represent the best option for everyone.

The way people are jumping on the fixed rate bandwagon is reminiscent of the way private investors tend to buy into equity stocks at the top of the market, just as the institutional investors are selling up and moving on.

To get the maximum advantage out of fixed rate mortgages, brokers should have been pushing them three, four or even five rate changes ago.

Now is too late to benefit from a fixed rate deal and for many borrowers, the much-vaunted security they bought with their fix will not seem such good value as the wheel turns and rates fall.

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