It’s time to batten down the hatches and fix your mortgage rate
How time flies. It doesn’t seem eight years ago that queues outside branches of Northern Rock started forming amid concerns the bank was about to collapse, leaving savers high and dry.
I remember the day well because I sent one of my team at The Mail on Sunday to report on events from outside the bank’s headquarters a stone’s throw from Newcastle. Keen to do a proper job, he managed to blag his way into the building before security cottoned on that he was a member of the fourth estate and proceeded to frog march him off the premises.
Indeed, he has not ventured back to the city since for fear of encountering the burly gentleman that unceremoniously removed him, although he’s itching to do the Great North Run.
Although Alistair Darling, Chancellor of the Exchequer at the time, averted a run on the bank by guaranteeing the savings of those with money tied up in it, the problems at Northern Rock marked the beginning of the country’s slide into recession as financial crisis gripped the country.
Eight years on, it is fair to say that the British economy has made a good recovery from the traumas of 2007 and 2008, although its health remains a little fragile.
China’s economic problems – if they persist – could well bring this recovery to a shuddering halt as might the failure of a number of European countries (Greece in particular) to tackle head on their chronic financial woes, with the result that the rest of Europe (including the UK) is plunged back into recession.
Despite events in China and Europe, there is now a growing consensus among economists that at some stage in the near future – maybe before the end of the year, maybe early next year – interest rates in the UK will begin to rise.
The Bank Base Rate, stuck at 0.5% since March 2009, will start notching up (it was at 5.75% when Northern Rock nearly hit the buffers). Mark Carney, Bank of England Governor, has said as much, recently stating that the process of raising rates will take place “around the turn of this year”.
Any rate rise when it comes is likely to be gentle – and insufficient to assuage the appetite of savers for more interest on their bank and building society savings. But it could unsteady the finances of those where the mortgage bill consumes a big chunk of the monthly household budget – and where their mortgage interest rate is variable rather than fixed. For them, any rise in Bank Base rate will trigger higher mortgage payments.
It’s why most homeowners should be looking to lock down their mortgage bills before the year is out – by taking out a two-, three-, five- or even 10-year fixed-rate loan. The earlier this is done, the better.
Many borrowers have already taken such action. The latest figures from the Bank of England show that between April and June this year nearly 79% of home loans granted were set up on a fixed rate basis with the average rate locked into being a touch over 2.9%.
Yet at the same time the Bank of England also published data indicating that fixed-rate mortgages only account for 44% of all outstanding home loans. In other words, 56% of home loans offer no protection against rising rates.
I recently got mortgage broker London & Country to do some simple number crunching for me. It calculated that someone with a £150,000 repayment loan currently on a 4.75% standard variable rate mortgage could save themselves more than £11,000 over five years by remortgaging to a best buy five year fixed rate deal. This assumes a 60% loan-to-value.
But the savings could be even greater if mortgage rates start rising as everyone predicts. If the 4.75% pay rate were to increase to say 5% at the start of next year – and then to 5.25% at the beginning of 2017 – the five-year saving jumps to more than £13,000.
Battening down your mortgage payments now by taking out a fixed-rate loan could prove your smartest financial move of 2015. Make time to do it.
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.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
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.