Find a better mortgage deal before interest rates rise
Over recent months, each time the Bank of England released its latest base rate figures, the UK braced itself for a rise. Talk of interest rate rises has been buzzing around since late last year, and when inflation crept up to 4.4% in February it seemed a rate rise was inevitable.
But in April came the surprising news that inflation had fallen. And while it was only down to 4% - still double the government's 2% target - it seems the fall was enough to delay a rate increase; the Monetary Policy Committee chose to keep rates on hold for the 25th month in a row.
That said, however, experts are still predicting a rise this year, most likely in the summer.
While any rate increases are likely to be slow and steady, those who are on their lender's standard variable rate (SVR) will certainly feel them, and the impending hike has led to an increase in the number of people choosing to remortgage.
But have those homeowners hoping to fix missed the boat?
To fix or not to fix?
According to John Charcol's latest mortgage index, the number of people opting for a fixed rate has risen from 17% in March 2010 to 32.3% in December 2010 and 56% in February this year.
This isn't surprising since at the beginning of the year lenders were still trying to entice borrowers to fix, with some deals as low as 2.98% (Yorkshire Building Society, 75% loan-to-value) and even 2.68% (Santander, 60% LTV).
But as lenders prepared for a potential rate rise, their fixed rates began inching upwards. The cheapest two-year rate currently available on a 75% LTV is 3.09% from National Counties Building Society, and for longer fixed rates - which are often sought by those wanting long-term security - the rates are higher.
Yorkshire Building Society's five-year fix, for example, is 4.39%. While this is not as competitive as the best SVRs and trackers currently available, fixed rates give cautious borrowers more security.
With fixed-rate mortgages, the interest rate is set for a fixed term. This means you'll know exactly what you're going to be paying, even if it's a little more than you would pay by taking your chances on a variable rate.
A lender's SVR is set at its discretion and is usually a couple of percentage points above the base rate. Tracker mortgage rates rise and fall in line with the Bank of England base rate. They will be set at a certain number of percentage points above base rate for a fixed amount of time, after which the mortgage reverts to the lender's SVR.
Trackers and SVRs can be volatile, so borrowers who would like to be more certain about their outgoings should consider remortgaging to a fixed rate.
What if you don't want to fix?
However, even those borrowers with a little more appetite for risk, who don't want to fix, should consider remortgaging to a better variable-rate deal this year, especially if they have paid off a considerable chunk of their mortgage.
"Anyone who is not on a competitive tracker rate or SVR should consider remortgaging, depending on how much equity they have in their property and their credit status," says Ray Boulger, senior technical manager at John Charcol.
"There are some good tracker and discount rates available, and the rate gets better as the amount of equity increases, with a few deals available below 2.5%.
"Some lenders offer deals with no early repayment charges and others offer a droplock facility, which means the borrower can switch to a fixed rate without incurring any early repayment charge, if their view on interest rates changes."
Boulger says many building societies have SVRs between 5% and 6% and most borrowers paying these rates will be able to remortgage to a better deal, providing they can prove adequate income and their credit status is OK.
"As a rule of thumb," he says, "unless a borrower is planning to move house in the next year or so, I would advise anyone paying 3.5% or more on their mortgage to consult an independent mortgage adviser to see whether a remortgage or switching to a different deal with the same lender is worthwhile, especially for those with at least 25% equity in their property."
Boulger says even with only 15% equity a remortgage will sometimes be worthwhile. "But if the equity is less than 15%, the only realistic option for a better deal is likely to be a product transfer with the current lender," he adds.
Hollingworth agrees. "Those who subscribe to base rate remaining lower for longer, and have enough budgeting flexibility to deal with rate rises when they come, will certainly find tracker rates appeal," he says.
"Some of the keen lifetime trackers don't lock the borrower in with early repayment penalties either, giving them the ability to review at a later date."
HSBC, for example, offers a 1.89% above the base rate for life, with no fee. ING offers a similar deal at 1.85% above the base rate for life, with a £945 fee.
But regardless of your attitudes to fixed or variable rates, it's important to review your financial obligations on a regular basis to ensure you're getting the most for your money. "There's never a bad time to review your mortgage options," says Hollingworth. "It will make sense for different borrowers for different reasons."
Stuck on whether you should fix or not?
Do you like to know exactly what you're spending?
Do you know exactly how much you pay on your mortgage? If so, you'll probably enjoy the reassurance of fixed rate offers.
Do you have a little extra each month that would cover you for unforeseen eventualities?
Do you have money left over before payday? When things go wrong unexpectedly are you able to cover the costs? If you're not strapped for cash, then you can afford to stick to a variable rate and monitor where interest rates go.
Would you prefer to pay the extra now to avoid a scare later?
Fixing now will probably mean taking a higher rate than you're currently on. But, if your monthly repayments were to shoot up unexpectedly and you're not sure you'd have the cash to cover it, it might be best to secure a relatively competitive fixed-rate deal now.
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.
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.
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.