More than two million borrowers will come off a fixed-rate mortgage over the next year and a half, according to the Council of Mortgage Lenders (CML). As a result, the majority will see their interest rate jump by between 0.75 and 1.5 per cent as they move on to their lender’s standard variable rate (SVR) – the lender-specific rate that most borrowers move to after any fixed or variable-rate period ends.
Recent figures from Bradford & Bingley emphasise the extent to which this could eat into your bank balance: a borrower with a £100,000 mortgage coming off a rate of, for example, 4.49 per cent (a typical best-buy fixed rate in 2005, according to B&B) and going on to an SVR of, say, 6.09 per cent (the average UK SVR for May 2007, according to the CML), would see an increase of £133.33 in monthly interest payments. Would you be able to squeeze an extra £130 out of your disposable income?
Payment shock
So how can you reduce this payment shock as far as possible? One way would be to look for a new deal to switch to as, or perhaps even before, your current deal comes to an end. The Bank of England has raised its base rate (the basis for most financial products’ interest rates in the UK) five times to 5.75 per cent within the past year, so you’re unlikely to find a deal that’s as competitive as a mortgage taken out two or three years ago, but surely it’s worth looking around for the next best thing?
Andy Wiggans, director of mortgages at B&B, says: Borrowers who have a mortgage with a two or three-year fixed-rate term that is coming to an end are undoubtedly going to feel the pinch when it comes to remortgaging, with five rate rises in the last year having pushed the base rate to its highest level since 2001.
He advises borrowers considering a remortgage to begin by choosing between a fixed and a variable-rate product. Wiggans explains: Fixed-rate mortgages are ideal for borrowers seeking peace of mind and security at a time when their finances may already be stretched by the increase in their monthly repayments. However, borrowers do need to consider that their fixed-rate deal may look uncompetitive in a few months’ time should rates start to fall back, as some predict [will happen]. While many may be happy to pay a premium for peace of mind, others may want to opt for a variable offer if they believe that, over the deal period, rates will lower. Borrowers should seek advice about which deal is right for them and their circumstances.
Helen Green, spokesperson for Cheltenham & Gloucester, agrees that borrowers should consider their own financial circumstances – both now and in the future – rather than simply trying to predict interest rate movements. For example, you may want to pay off a lump sum or take a repayment holiday – it’s essential you make a decision that is right for you, she advises.
In addition, your research shouldn’t begin and end with the headline rate. Instead look at the whole package – this includes the rate but also the fees, the length of any tie-ins and any other benefits the lender is offering, such as discounted or no legal fees, Green continues. The best rate may not always be the best product for your personal financial situation.
High fee / low rate?
This brings us to another aspect of the mortgage market that has changed considerably in recent years and another potential shock to your bank balance, I’m afraid – fees and charges. Moneyfacts.co.uk, a financial comparison site, recently published figures showing the extent to which fees have distorted the real cost of many mortgage products. When it compared current competitive two-year fixed-rate mortgages to those from May 2001, it found the true cost (rate plus fees and charges) over the two-year deal period was £800 more, with a £500 increase in costs for a two-year discount product between May 2001 and the present day.
But that’s not to say high-fee deals should be completely discounted by all borrowers. Green reiterates that in the world of mortgages it’s never a case of ‘one size fits all’. She explains: A higher upfront fee may provide a lower rate, which means that the customer will benefit from a lower long-term cost. But some consumers may find that a low or no-fee product is best for them (see case study).
If you are currently faced with moving to your lender’s SVR, it certainly won’t hurt to have a look around to see what else is on offer. You may find a great new deal with similar or even lower monthly payments to your current deal. Alternatively, your current borrower may be prepared to offer you a new deal to stay – you’ll never know unless you ask.
A sudden shock often calls for a strong cup of sugary tea, but unfortunately in the case of mortgage payment shocks that’s not really going to do much good. Far better that you get on the internet or seek some independent advice on the best remortgage for your current circumstances.
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