How to avoid mortgage payment shock
1 What will happen?
If you don't act before or when your fixed-rate deal ends, you will automatically be transferred onto your lender's standard variable rate (SVR), which could be as high as 7.75%. If you had previously been paying the average fixed rate in 2005 of 4.49%, your monthly repayments on a £125,000 repayment mortgage would increase by £250 from £694 to £944.
2 What should I do?
Around three months before your mortgage deal ends, shop around to see what other lenders can offer you. However, if you don't have that much time, just start as soon as possible. It's worth speaking to your existing lender, but it's unlikely they will be able to offer you the best deal on the market. It is a good idea to speak to an FSA-regulated mortgage broker, they will help you find the right deal for you.
3 Type of deal
While fixed rates remain popular in securing the size of your monthly repayments, you can expect to pay more for the privilege now. But that doesn't mean a tracker mortgage is right for you. Speak to a mortgage broker to find out where the best deals are and which ones might be right for you.
4 Small print
While the rate on your mortgage will be important in determining the size of your monthly repayments, there are number of other factors to bear in mind. Consider whether you need a flexible product, which allows under and overpayments, in addition to arrangement fees, and penalties if you pay off your mortgage early. Good customer service is also a big factor.
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.
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.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.