Low mortgage rates create ‘spoilt’ generationLow rates lead to unrealistic expectations
10 January 2011
New research has revealed that the average rate homeowners would be prepared to pay for a fixed-rate mortgage is now just 3.3% - down from 4% in January 2009, and an unrealistically low rate according to mortgage experts.
The Bank of England base rate has been at an all-time low of 0.5% for 21 months now, and tracking data from unbiased.co.uk has revealed the emergence of a new ‘rate spoilt’ generation.
According to its report, homeowners have begun to ‘lose touch with mortgage reality’, with almost one in six borrowers saying they would only be prepared to fix their mortgage at a rate of 2% or less for three years.
Right now, the cheapest three-year fixed-rate mortgages on the market actually cost around 3.5% - and historical data from 2005 onwards shows that fixed-rate mortgage deals have never been available at rates as low as 2%. This highlights the stark contrast between homeowners’ ideals and reality, unbiased.co.uk says.
Low mortgage rates won’t last forever
With standard variable rate (SVR) mortgages currently cheaper than the market’s best fixed-rate deals, it’s perhaps no surprise that many homeowners seem to be putting off remortgaging, preferring to wait until the Bank of England base rate begins to rise again.
According to unbiased’s statistics, when describing their current mortgage situation over a third of homeowners state they are on their lender’s SVR and have no plans to change this. On the other hand, just one fifth of homeowners have recently tied into another fixed-rate mortgage deal, and only a quarter of people whose mortgage deals are about to end are intending to move onto a new deal, rather than their lender’s SVR.
Karen Barrett, Chief Executive of unbiased.co.uk, commented: ‘With the base rate now remaining at a record low for 21 months, our tracked research shows this has had a dramatic effect on homeowners’ rate expectations.
‘Their ideas of what is a reasonable fixed-rate mortgage have become distorted in the low interest rate environment, and they need to ensure that their mortgage expectations are realistic. While record numbers of homeowners remain on their lender’s SVR instead of tying into another deal, and with many predictions for rate rises during 2011, homeowners need to be alert to ensure they don’t miss out on getting the best deals before it’s too late.’
Which? mortgage calculator
Which? property and mortgages expert Cathy Neal says: ‘It’s certainly true that nobody knows when the Bank of England will choose to raise the base rate – and it’s important for homeowners to be aware that when it starts to increase again, mortgage rates will go up. In fact, by the time the base rate rises fixed rates may already have started to rise.
‘Staying on your bank’s SVR is always a gamble, as the clue is in the title: it’s a variable rate that could increase at any time, whether or not the Bank of England changes the base rate.
‘That said, opting for a new fixed-rate deal now might not suit everyone. If you’re comfortable you could afford an increase in your monthly payments, for example, you could save money in the long term by overpaying your mortgage now, while it is at a lower rate.
‘If you are on the hunt for a new deal, make sure you remember to compare the total cost of the mortgages you’re looking at – not just the headline rate of interest. This is important as some lenders charge such high fees for arranging your deal that a seemingly cheap mortgage can end up being expensive.
‘The unique Which? mortgage calculator will do this for you in a single easy step – so be sure to consult it before signing on the dotted line.’
You can read more about the different types of mortgages that might be available to you in our Mortgage basics and Mortgage deals explained advice guides.
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