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June 21, 2009    

No turning back for fixed rates

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by Gill Montia

Latest figures from Moneyfacts.co.uk show a sharp rise in the cost of a two-year fixed-rate mortgage during the past week.

According to the financial website, the average cost of a two-year fixed-rate deal increased by 0.16% between Monday and Friday, to 4.90%.

Meanwhile, five-year fixes increased by an average 0.21% over the same period, to 5.82%.

Nationwide began the round of increases and has been followed by other leading lenders including Abbey, Cheltenham & Gloucester, Halifax and Yorkshire Building Society.

Fixed rates are determined by money market swap rates and mortgage experts have been warning for weeks that swap rates are set to rise, reflecting as they do forecasts for the future direction of interest rates.

Unfortunately, lenders’ margins have also risen since fixed-rate deals recently bottomed out from their record high levels of June last year.

Moneyfacts analyst Michelle Slade explains: “In June 2008, when the average rate hit its peak the margin over swaps was 0.76%. Today the margin is 2.35% and it is hard to foresee anything other than fixed rates increasing even further.”

However, the majority of borrowers could remain convinced that they need the protection of a fixed-rate deal, against future rate rises.

Recent research from Abbey shows that in May, 60% of homeowners preferred the idea of a fixed-rate home loan for this reason.

The study also revealed that the number of borrowers opting for a ten-year fix had doubled since January.

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