To say that changing your mortgage could change your life might be a bit of an overstatement. But it can certainly change your lifestyle, by making savings on your monthly outgoings that could be spent on other things.
The message seems to be getting through to homeowners that they donÂ’t need to meekly pay whatever rate they are being charged by their existing lender, when they could shop around for a better deal.
This is borne out by Bank of England figures, which showed that remortgaging hit record levels just before Christmas, as a growing number of fixed-rate deals came to an end, prompting borrowers to look for a new deal.
John Mills, managing director at mortgage adviser Westpoint Mortgages, said: “We have been busier than ever since the start of the year, with most people opting for a short-term fix.
“People seem to be choosing two years rather than five, and although there are still some good longer-term deals to be had, people want to hedge their bets about which way interest rates might move by not tying themselves in for too long.”
According to figures published by the Council of Mortgage Lenders (CML), over 40 per cent of borrowers remortgaged in 2005, compared with just 18 per cent 10 years earlier.
SVRs – still uncompetitive?
Bradford & Bingley recently published figures showing that homeowners with a typical loan of £100,000, currently languishing on their lender’s standard variable rate, could save around £150 a month – £1,800 a year – by moving to a market-leading deal.
The worst thing is that many borrowers stuck on an SVR donÂ’t even know how badly off they are.
Andrew Nicholson, marketing manager at First Active, said: “The older generation is the worst off, with 71 per cent of over-55s not knowing what their new SVR rate will be when their initial rate ends, so they don’t know how much they could save if they changed lenders.”
“Despite the availability of attractive, money-saving options, many homeowners mistakenly believe the process of switching lender will be overwhelming and not worth the hassle. Yet, these days, mortgage providers are making it easier than ever for borrowers to save money by switching to a better rate.”
How to get a better deal.
Your first stop should always be your existing lender, to see if they will offer you another competitive deal. If they can, you can save yourself some of the fees involved with moving your mortgage.
Duncan Pownall, mortgage development manager at Bradford & Bingley, says: “This year will also see many lenders offering fantastic retention deals, in a bid to keep their existing customer base.
This is great news for borrowers – but they should still ensure they shop around, because competition will be fierce and they could still end up with a better deal by switching.”
If your current lender won’t play ball – and some lenders are still only making their best offers available to new customers – start shopping around.
Many lenders will pick up your valuation and legal fees – but don’t forget to factor these into the cost of switching if they don’t.
What are the choices on offer?
Fixed rate.
The most popular type of loan right now is a fixed rate. Typical periods are two or five years, but it is possible to fix for 10 years, or even 25 years and beyond. If you have a fixed-rate loan, you could find yourself paying over the odds if interest rates fall.
But a fixed rate means you know exactly how much you will pay each month for the period you have fixed your loan for – a valuable feature for people who need to budget, such as first-time buyers.
Discounted.
A discount mortgage gives you a certain percentage off a lenderÂ’s standard variable rate for a set period, after which the rate reverts to the SVR.
The rate is not fixed and can go up and down with the SVR at the lenderÂ’s discretion. The low-cost start makes this type of deal suitable for first-time buyers on a tight budget, if they expect to have more money after the initial period ends.
Watch out for overhanging redemption penalties, though, which can tie you into the lenderÂ’s SVR after the deal has ended. These are expensive and likely to outweigh any savings made on the initial low rate.
Tracker.
Tracker mortgages are also variable-rate mortgages, which means their rates move up and down. But instead of being tied to the lenderÂ’s SVR, which moves at the lenderÂ’s discretion, they reflect the movement of other indices.
The most usual one is the Bank of England’s base rate – currently at 4.50 per cent – but loans can be linked to other indices, such as Libor – the London Interbank Offered Rate, the rate at which banks lend money to each other.
Capped Capped mortgages are also variable-rate loans, but the cap means they will not rise above a certain predetermined amount. You can also get a variant with a ‘floor’, below which the rate cannot fall.
This is called a ‘cap and collar’ mortgage. You will usually pay a little more than on a straight discounted variable rate for the security of the cap.
Flexible.
Overpayment facilities are without doubt the most useful options available with a flexible mortgage.
You can also take payment holidays, or draw the money out again if you have a sudden need for cash, subject to specific rules.
But overpaying helps to cut the total amount of interest you pay over the mortgage term or the mortgage term itself.
Offset mortgages, which go further along the flexible route, are becoming increasingly popular. With these loans, you have a savings account and a mortgage with the same bank or building society.
You pay interest only on the difference between the two – so if you have savings of £20,000 and a mortgage of £150,000, you pay interest on only £130,000.
You wonÂ’t receive interest on your savings, but as mortgage rates are generally lower than savings interest rates, offset borrowers benefit from this in the end.
You effectively also save tax because you avoid the taxable interest on the savings account. Family offsets like those offered by Yorkshire Building Society and the Woolwich allow other members of your family to have their savings interest offset against your loan, but in all other respects keep their savings accounts totally separate.
A current account mortgage, such as the One Account, can hold your mortgage, current account and savings in the same account.
Each month your salary goes in on top of any savings you may have, dramatically reducing the amount of interest you owe the lender.
This gradually increases again as you draw on the account for expenditure throughout the month, but as long as you stay in the black it decreases the amount of interest paid over your term.
But do you need a fancy deal after all? Stafford RailwayÂ’s SVR of 5.45 per cent and Harpenden Building SocietyÂ’s 5.49 per cent are lower than many fixed-rate deals.
If your loan is small, or a repayment mortgage near to the end of its term, making your monthly repayments almost entirely capital, you may be better off just sticking with your SVR.
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