Can you find a fixed-rate mortgage before rates rise?
There has never been a cheaper time to take out a mortgage, and there probably never will be. Yet surprisingly few people are taking advantage of this once-in-a lifetime opportunity to save money.
Lenders are in the middle of an aggressive mortgage war, slashing rates to all-time lows for both new buyers and existing owners. In the past year, the average two-year tracker has fallen 51 percentage points to just 2.38%, according to Moneyfacts.
Homeowners who have been loyal to the same lender for years now have a great opportunity to grab a cut-price deal, yet just 24,000 people remortgaged in November – down 8% on the previous month and a 5% fall year-on-year – according to the Council of Mortgage Lenders.
Remember the 1970s film Suppose They Gave a War and Nobody Came?, that's how the mortgage market feels to many analysts right now.
Battle lines drawn
The battle heated up in November when five lenders announced rates cuts in a single day. Highlights included a two-year fix from Norwich & Peterborough charging just 1.64% to 75% loan- to-value (LTV), with a £1,295 fee.
And Tesco Bank launched a five-year fix charging 3.8% on 80% LTV, as lenders finally improve rates for borrowers with smaller deposits or less equity in their homes.
Borrowers are the real winners from the mortgage war, yet too few are taking advantage – even against a backdrop of predictions of the first base-rate rise finally arriving in 2015.
One in five mortgage holders says they would struggle to find the extra money to cover any increase in repayments, according to the Money Advice Service. Nearly half will struggle to pay up to £150 extra every month.
Yet only one in three has prepared for the impact of rising rates, according to Legal & General Mortgage Club.
If rising rates would make your mortgage unaffordable, most mortgage advisers state that you should protect yourself by locking into today's historic low rates. Or if you're paying too much on your lender's standard variable rate (SVR), shop around to see how much
you could save.
Building societies tend to have the priciest SVRs, with Bath, Chelsea, Hinckley & Rugby, Manchester, Saffron, Leeds, Furness and others charging more than 5%, while Newcastle and Nottingham each charge a whopping 5.99%.
The big banks are slightly cheaper, with Barclays, Halifax, Lloyds and Nationwide charging 3.99%, and NatWest charging 4%. Other banks are pricier, notably Santander (4.74%), and Virgin Money (4.79%). Brian Murphy, head of lending at the Mortgage Advice Bureau, says it is worth the effort of remortgaging from an expensive SVR.
"The good news is that the sharp rise in house prices over the last year has boosted people's housing equity, giving them access to lower LTV mortgages with cheaper rates."
At 60% LTV, you can get two-year fixed rates from just 1.40%, he says. "This climbs to around 1.70% at 75% LTV and 2.30% at 85% LTV."
To put those figures in context, if you had a £100,000 mortgage and were paying Leeds Building Society's SVR of 5.69% over a 20-year repayment term, your repayments would be £699 a month. But if you remortgaged to Tesco's five-year fix at 3.09%, your monthly repayment would instantly fall to £559, saving you £140. Over the five-year term of your fix, you would save £7,178, and that's after deducting Tesco's £195 arrangement fee.
Even if you can cut a couple of percentage points off your mortgage, remortgaging is well worth the effort, although it has got slightly more difficult following a regulatory overhaul called the Mortgage Market Review, introduced in April 2014.
Lenders must now ask more probing questions about your personal spending habits, to make sure you can afford the loan, and will also stress-test your application to see if you could still afford it if rates rose by up to 3%.
You should also factor in all the costs of remortgaging, which can eat into the money you save. David Hollingworth, broker at London & Country Mortgages, says: "Pay particular attention to the mortgage arrangement fee, which can range from £199 to £1,999."
Virgin Money, for example, is offering a two-year fixed rate charging just 1.69%, and a five-year fix at just 2.55% to 65% LTV, both with a £1,495 arrangement fee reduced by up to 0.14%.
The larger your mortgage, the more sense it makes to pay a high fee in return for a low interest rate, Hollingworth says. "If you're only borrowing a small amount, look for mortgages with low or zero fees." But allow for other remortgage costs, such as your property valuation and legal work, which can add up to hundreds of pounds.
Hollingworth says that many lenders offer free valuation and free legals for straightforward remortgages. "Coventry Building Society, for example, offers a two-year fix charging 2.09% to 65% LTV, with no arrangement fee, free valuation and free legal work for remortgages."
Before switching to a new deal, make sure you won't have to pay any early repayment charges (ERCs) on your current home loan, as that would probably wipe out any savings. Once you're ready to switch, you then have to decide what type of deal is right for you.
Adrian Anderson, director of mortgage broker Anderson Harris, says: "If you want to know exactly how much your mortgage will cost each month, a fixed rate makes sense, provided you are willing to tie yourself down, because there are penalties if you want to get out of it early."
If you have more of a financial cushion, and reckon that interest rates will stay low for a long time, you can secure a slightly cheaper rate on a tracker mortgage. Anderson says: "Bank of England governor Mark Carney says interest rates may start rising towards the end of 2015, but only slowly, and peak at around 2% to 3%. So it may be right for some to take a chance on a tracker."
Mark Harris at mortgage broker SPF Private Clients, says there are some great base-rate trackers on the market right now: "Barclays has a cracker at just 0.79% over base rate, giving a pay rate of just 1.29% to 60% LTV, with an arrangement fee of £999."
Pricey standard variable rates
First Direct has a market-leading lifetime tracker, which charges 1.29% above base rate for the full term of your mortgage, giving a current pay rate of 1.79% up to 65% LTV, with a £950 fee.
Unfortunately, if you only have a small amount of equity in your home, the price war won't help you escape a pricey SVR. At 95% LTV, the average two- year fixed rate charges 5.11%, rising to 5.38% for a five-year fix, according to Moneyfacts. That falls to 3.90% for a two-year fix and 4.66% for a five-year fix at 90% LTV. Life gets easier at 80% LTV, where Nationwide offers a three-year variable rate charging 2.19% with no product fees.
Two-year fixed rates are still the most popular type of deal for both buyers and remortgages. The downside is that protection may expire just as interest rates finally start rising.
Five-year fixed rates give you longer protection for little extra cost, and will spare you having to shop around for a new deal in a couple of years (and pay another set of arrangement fees).
But a growing number of borrowers are willing to commit themselves for even longer than that. There has been an explosion in the 10-year fixed-rate mortgage market lately, with the total number of deals rising fivefold in the last year, according to Moneyfacts.co.uk.
A year ago, there were just eight 10-year fixed-rate mortgages on the market but that has risen to 77 today, according to Moneyfacts. This is partly driven by lower rates, with the average 10-year fix tumbling from 4.98% to 4.33% in November alone.
Sylvia Waycot, editor at Moneyfacts.co.uk, says: "After a few years, today's 4.33% could look incredibly cheap."
Plus you may also make a big saving on remortgage costs, she says. "A borrower who favours a two-year fix will have paid five sets of arrangement fees in the time it will take for one 10-year deal to expire. That's likely to work out more expensive in the long run."
Nationwide is currently offering a 10-year fix at 4.04% to 75% LTV, with no product fees. By 2025, when that deal runs out, this rate could look incredibly low. But would you really want to lock yourself into a mortgage for such a lengthy period? A lot could happen in that time.
Waycot says: "When considering a 10-year fixed rate, it's important to make sure your deal is portable, as you may need to move home and you won't want to incur expensive early redemption fees."
Despite the growing buzz surrounding 10-year fixed rates, most borrowers won't want to lock into their mortgage for such a long period. First- time buyers may be particularly reluctant, as they are more likely to want to move on after a few years.
Interest rates can hardly fall much lower than they are today. Homeowners should seize the opportunity while it lasts and enjoy today's low rates far into the future.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.