More Than Three Quarters Of All New Homeowner Loans On A Fixed Rate April 30th, 2009
The first three months of this year has seen a dramatic change in the Bank of England base rate of interest, with the rate falling to an all time low level of just 0.5 per cent.
Not surprisingly, with this change in rates has also come a change in borrower’s choice of loan product when they take out a new homeowner loan. Since the beginning of the year, there has been a huge shift towards individuals taking out a fixed rate homeowner loan, with a total of 80.9 per cent of all loans being on a fixed rate basis in the month of March, compared with just 29.1 per cent in December last year.
With the base rate of interest so low, a fixed rate loan seems extremely attractive at the moment, due to the fact that everybody knows that interest rates can only realistically move in one direction, upwards. The problem is that banks and building societies also know that interest rates will increase and are therefore placing quite a large premium on top of the base rate for those borrowers wanting a fixed rate loan.
The gamble which everybody is taking, both borrowers and lenders, is will interest rates rise before the fixed rate loan deals expire, or will interest rates remain at a low level thereby cancelling out any benefits to be had from a fixed rate homeowner loan, and therefore making it a rather expensive option for the borrower.
Even if the base rate increases dramatically over the course of the next two years and borrowers who take out a fixed rate loan now, actually benefit from the loan deal they are on, they still need to be careful and budget accordingly for the future, because once the initial fixed rate term expires they are likely to be in for a nasty shock with a sudden jump in repayments once their loan reverts to the much higher standard variable rate.