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Mortgage warning for ‘rate-spoilt’ generation

Mortgage warning for ‘rate-spoilt’ generation

Category: Mortgages

Updated: 12/01/2011
First Published: 12/01/2011

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Homeowner expectations of what constitutes a reasonable fixed rate mortgage have been distorted by the ongoing presence of low interest rates in the past couple of years, it has been warned.

New research reveals the average rate homeowners would be prepared to fix at is now just 3.3%, down from 4.0% in January 2009.

Almost one in six borrowers would only be happy with a fixed rate deal of 2% or less for the next three years.

With the Bank of England base rate remaining at 0.5% for a record 21 months, unbiased.co.uk says that a new 'rate-spoilt' generation has emerged.

The website says it appears the lengthy period of low interest rates has resulted in homeowners losing touch with mortgage reality, as best buys for three year fixed rate mortgages are currently around 5.1%, almost 2% more than the average homeowner is currently willing to pay.

It also suggests that with fixed rate mortgage deals reaching around 7.8% at the end of 2007, the current average fixed rate deal of 5% could represent a good long term deal, particularly as many experts are predicting interest rates could soon rise.

Yet with standard variable rate (SVR) mortgages currently remaining lower than best buy fixed rate mortgage deals, many homeowners still seem to be refraining from remortgaging to a fixed rate deal until the base rate starts to rise.

Just under a third (31%) of all homeowners said they are on their lender's SVR mortgage and have no plans to move.

By contrast, only a fifth (22%) have recently tied into another fixed rate deal after their previous fixed rate ended, in preference to automatically moving onto their lender's SVR.

Similarly, just a quarter (25%) of those currently on a fixed rate mortgage who are coming to the end of their deal will move onto a new deal as soon as this one ends.

"With the base rate now remaining at a record low of 0.5% for 21 months, possibly 22 months after Thursday's base rate decision, our tracked research shows this has had a dramatic effect on homeowners' rate expectations," said Karen Barrett, chief executive of unbiased.co.uk.

"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."

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