Many people had come to expect mortgage rates to move in synchronised step with changes in the Bank of England base rate and with interest rates being reviewed and adjusted on a monthly cycle, there was always plenty of evidence to show this to be true.

If you were looking at changing to a new tracker mortgage and the market consensus was that interest rates were set to reduce, then you knew you could look forward to taking advantage of those moves. The choice of a fixed rate alternative had to be quite a special deal to move your thoughts away from a tracker deal that was set to get cheaper and cheaper as rates reduced.

But about 2 years ago something changed. Perhaps people were being allowed to take larger and larger amounts on their mortgages and with interest rates quite low historically they must have been sslightly concerned about how they would continue to repay their mortgages if interest rates started to increase. And coming from such a low base, any increase was likely to prove a significant one.

So the rebirth of the fixed rate mortgage offer started. It provided a safety net for people who knew they would struggle if rates started to increase. Of course the lenders still made their profits from these deals, either through setup charges or interest charges through monthly repayments, but perhaps borrowers were viewing the fixed rate deals with rose tinted spectacles. There seemed to be no downside to these deals. Until now that is.

Two things have happened to make these fixed rate deals a dangerous place. Although interest rates have come down by 0.5% recently, let's not forget the 5 step increases in base rates before that reduction. That meant the rates being charged for fixed rate deals had slowly crept up. But the big factor has been the credit crunch. The huge losses made by many banks and building societies have stopped the recent interest rate reductions working their way through to mortgage offers. In fact rates on tracker mortgages and fixed rate mortgages are still increasing. Also some experts are suggesting that these difficult times in the mortgage marketplace are not a short-term situation. Even if global credit markets recover, the wounds caused by sub-prime credit losses and the exposure from underwriting risk-laden mortgages will be slow to heal. In fact those fixed rate mortgage deals that people picked up 2 or 3 years back may prove the have been the best ever products of their type.

But what is likely to hurt most, a life-threatening injury perhaps, to continue the analogy, will be the choice of deals on offer when those mortgagees come to remortgage over the next few months. Millions of people are in this situation, thanks to fixed rate mortgage deals becoming the most popular type of mortgage at the moment (over half of people with a mortgage currently have a fixed rate deal) and when they go back to their lender or mortgage broker to pick their next deal, they can expect to have to dip into their disposable income to be able to afford their new repayments. And if they don't have that extra cash to hand, they'll be faced with some tough choices, with the worst cases leading to repossessions.

Return to News index