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To fix or not to fix, that is the question

There has been a lot of discussion recently about which lenders have passed on rate cuts and which haven’t.

And although we thought reduced lending volumes meant innovation was out of the question, one lender has proved us wrong.

Scottish Widows has introduced a variable rate mortgage that is priced above not below its SVR.

One can see how extreme the market has become when this happens.

New transactions have dried up and the remortgaging market has also slowed down, with the declining base rate making some lenders’ SVRs cheaper than fixed or tracker rates. This is unprecedented.

Of course, such deals have the added benefit of no expensive arrangement fees or early repayment charges.

Not only can customers benefit from further base rate falls but when rates do rise they can switch to fixed rate mortgages to protect themselves.

While all the focus has been on base rate trackers and whether lenders are passing on rate cuts, fixed rates are well worth a look as they have been steadily edging down in recent weeks.

You might ask why anyone would opt for a fix when everyone predicts that the base rate will keep falling.

Well, interest rate volatility can be extreme. After all, not that long ago the base rate was going up.

So cheap fixed rate deals are not that ridiculous an option, particularly for borrowers who crave some security with their monthly mortgage repayments.

In this light it’s worth considering some of the fixed rates that are now available. With swap rates falling, it is possible to source excellent fixed rates at less than 5% for borrowers requiring LTVs of around 60%. These are good deals in anyone’s book, no matter where we are in the interest rate cycle.

There may be a groundswell of opinion that the base rate has further to fall but not all clients can afford to make the wrong choice.

If rates rise many borrowers will struggle with their mortgage repayments if they are on lenders’ SVRs.

Of course, they could then switch to fixed rate products but by then it is highly unlikely that they will find anything under 5%.

Opting for cheap fixed rates now may be a worthwhile move although borrowers won’t know whether they were right to do so for several years down the line.

Ultimately there is so much uncertainty at the moment and some clients can’t afford to be wrong.

Brokers must take this into account when providing advice to customers.

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