Coming to a bank near you: the 9% mortgage

If, like me, you’re holding out for cheaper fixed mortgage deals, last week’s review of the global banking crisis by Lord Turner, chairman of the Financial Services Authority, showed just how long a waiting game it could be.

Buried in the report was a startling figure: mortgage rates can stay high for six to nine years after the onset of a banking crisis.

Turner wants banks to hold much more capital to prevent the failures of Northern Rock, Bradford & Bingley and Halifax Bank of Scotland from being repeated.

A laudable aim, of course, but this being the banking sector, customers will ultimately pay. Holding more capital increases banks’ costs, which are in turn passed on to you and me in the form of a wider spread between the rates paid on our savings and the rates charged on our debt.

Indeed, the margins on tracker mortgages are now so fat that the 9% mortgage may not be far off. Nationwide building society has the biggest margin on a tracker mortgage, according to brokers.

Its two-year deal for those with a deposit of at least 15% is 4.58 percentage points above Bank rate, or 5.08%; its three-year deal has a margin of 4.53 points, or 5.03%.

These rates are pretty poor with Bank rate at just 0.5%, so imagine how bad they’d look if interest rates were back at a more “normal” level of, say, 4%. That would give you pay rates of 8.58% and 8.53% respectively.

It may seem odd to be thinking about higher interest rates when the country is set to fall into deflation on Tuesday, but rate rises could be closer than we think.

Investors are at their most optimistic about the global economy since December 2005, according to the latest survey of fund managers from investment bank Merrill Lynch.

For the first time in more than three years, investors are not predicting lower global growth over the next 12 months, thanks largely to renewed optimism about China.

Indeed, last week saw a strong rally in all the assets you would normally associate with stronger growth — and therefore higher interest rates. Oil soared 7% in one day alone, breaking the $50 level, while copper surged to a four-month high.

Having shamelessly widened the spread between mortgage rates and the cost of funding as interest rates have come down, banks are unlikely to close the gap again as rates head back up — as Turner’s report highlighted.

The best two-year fix, from First Direct at 2.99%, is currently 0.8 points above the cost of funding; six months ago, the margin was only 0.24 points, according to figures from Savills Private Finance.

The best tracker — 2.89% from First Direct — is 1.1 points higher than wholesale rates.

So should you be locking into a fix now to protect yourself from these big tracker margins? Melanie Bien at Savills thinks so — but for five years, not two. Abbey, part of Spanish giant Santander, is offering a five-year deal at 3.95% with a £995 fee — if you have 40% equity. “Anything at below 5% for a five-year fix is pretty attractive,” said Bien.

Ray Boulger over at rival John Charcol gives a politician’s answer. If you’re buying a property, he would also lock into a fix now — particularly if you have a relatively small deposit. If you play the waiting game on a tracker and house prices fall further, you may find you don’t have enough equity when you try to switch to a fix in a year or so. If you’re an existing homeowner on your lender’s standard variable rate, however, he says there is no need to rush as the chances are the SVR is lower than the current fixed rates.

There are big dangers with this approach, though — when rates eventually rise, they may do so quickly. “If \ are to avert inflation, interest rates will need to be raised earlier into any upturn and more rapidly than in the 2003-5 period,” said Max King, economist at Investec.

Work out how much more you’d pay on a fix, compare it with what you were paying before interest rates started falling, and if it’s a price you’re willing to pay for long-term security, then it’s time to fix.

Source: Kathryn Cooper Times Online