Unless your mortgage is already fixed for the long term, this week’s interest rate rise, following hot on the heels of December’s, is likely to have given you cause for concern. About 2 million borrowers are on variable rate deals of some kind, and many have already seen an increase in their repayments following the last base-rate rise. Thousands more are on fixed-rate deals that come to an end over the next few months.
With other living costs rising, remortgaging might be a good bet. Some people will be able to save more than £200 a month, or in excess of £2,000 a year, just by making a fairly simple switch.
“Mortgages are the one aspect of good news here, because there is still something you can do about the cost,” says David Hollingworth at the broker L&C Mortgages. “You can ease the pressure elsewhere by taking appropriate action.”
What “appropriate action” is, will depend on your circumstances, but you should, at least, start with a look at your current situation.
Are you paying your lender’s standard variable rate (SVR), and, if so, how much is it? Are you on a special deal of some sort, and, if so, when does it end? If you jump ship early, are there any redemption charges to pay? These are fees that a lender charges when you pay off your mortgage before the end of a special offer rate, and are usually equivalent to a set percentage of your outstanding mortgage debt.
If you are on a lender’s SVR
It is likely that you have just been hit with an increase in your monthly bill linked to December’s Bank of England decision, and you now face another 0.25 percentage point rise.
But not all borrowers are facing higher costs yet. HSBC is one large lender that has not passed on the increase, and Yorkshire building society has held its SVR, too.
The SVRs of these two are quite different: HSBC’s is 3.54%, while Yorkshire’s is 4.49%. If you are on the latter, you could reduce your monthly outgoings considerably by moving to a better deal.
Hollingworth gives the example of switching from Yorkshire’s SVR to a market-leading five-year fix at First Direct which has a rate of 1.54% and a £490 fee. That would cut your monthly repayments by £222 and, over 12 months, that would save you £2,169 once you’ve taken the fee into account.
However, if you have slipped on to the SVR because your mortgage is nearing an end, you might not be able to benefit.
“With a smaller mortgage, even low costs will start to deplete the savings,” Hollingworth says. “If you’ve got, say, two years left to run, you’re probably best off looking to your existing lender to see if it can do a better rate over the remaining time.”
If you have a tracker mortgage
You will definitely feel the effect of any interest rate rises, and may be getting concerned by predictions that the base rate could hit 1.5% next year.
It makes sense to shop around if your deal has no early repayment charges (ERCs) – unless you chose that deal because you wanted the option to pay it off early, or there was another reason why you wanted flexibility that still stands.
If you do have ERCs to consider, check how much they are. The percentage usually goes down as the end of the deal looms, so the longer you have had the mortgage, the less you will need to pay. But anything you do pay to escape the mortgage will need to be made up in savings. “You might end up out of pocket,” Hollingworth says.
Say, for example, you owe £150,000 and your mortgage comes with a 1% ERC in the final year of the tracker rate, that means you will pay £1,500 to move now.
To make the ERC worth paying, you need to think that rates are moving upwards so quickly that whatever you can lock into at the end of your deal will cost you more than that over the term of the next deal you lock in to.
If you are in the last year of your tracker rate, you do not need to wait until the end to take up a new deal.
Many lenders let you lock in and complete six months later.
If you find a deal with free legals and a free valuation and opt to add the arrangement fee to your mortgage, you won’t need to pay a penny now, says Nick Mendes of the broker John Charcol. “If mortgage rates go up, you’ve secured a deal based on what’s on offer today, but you haven’t completed, so if they do go down you can apply for something else,” he says.
Hollingworth has one word of caution: if it’s a new fixed-rate, check what the end date is, and “make sure you’re not eating into the benefit period”.
If your fixed rate ends this year
You are currently cushioned from the rises, but may be starting to worry about what happens next.
You also have the option of applying for a new deal up to six months before you need to switch – make sure you check if the lender does have that long a window for completion before you sign up.
Mendes says that for anyone looking to remortgage, lenders have loosened restrictions on loans to the self-employed, but are looking closely at affordability.
He warns that a flurry of buynow, pay later borrowing could cause a problem if you want to take out a new mortgage. “We are starting to see household incomes stretched and if people turn to other forms of credit that could cause them problems,” he says.
The affordable 10-year fix
The cost of locking in your mortgage for 10 years has fallen after Lloyds reduced the rate on its decade-long fix to 1.66% for remortgagers.
Experts say it is the cheapest 10-year deal they can remember, and could lead to other lenders offering similar rates over the same period.
The mortgage has a £1,000 fee and early redemption fees starting at 6% for the first five years and then gradually falling to 1% in the final year. It is available up to 60% loan to value. Home movers can get a rate of 1.68% from Halifax via brokers.
“To lock in for 10 years below 2% is amazing,” says L&C’s David Hollingworth. Nick Mendes says that some borrowers feel uncomfortable about locking in for so long because of the charges if things change. However, the mortgage is portable, which means that if you move house, you can transfer it.
