Should you fix your mortgage?
The CBI says rates will have to go up to control inflation. Whether or not rates do rise that high remains to be seen, but one thing is for sure: rates are not going to come down.
That means it's high time for the many thousands of households, who have been resting on their laurels and relying on their lender's low standard variable rate (SVR), to think about hunting down a good remortgage deal.
Rock-bottom interest rates mean remortgaging has slipped off the radar for many people. Yet back in the heady days of 2006, when credit was plentiful and the words 'credit crunch' and 'recession' didn't crop up from one month to the next, consumers were remortgaging like there was no tomorrow.
But then the bubble burst. For homeowners, the upside was that the Bank of England base rate dropped to just 0.5%, the lowest rate in history. Lenders were promoting some of the most competitive SVR rates we've seen in years, with Nationwide, for instance, offering a rate of just 2.5%.
So when many borrowers came to the end of their fixed-rate mortgage term, instead of looking for a better deal, the most obvious solution was to stick with their lender's SVR.
But all that is about to change. With experts predicting that 2011 could see the first base rate rise since 2007, many lenders have begun offering more competitive deals to attract customers keen to fix before the hike.
"Lenders are trying to encourage borrowers to remortgage," says Michelle Slade, spokesperson at Moneyfacts. "The average two, three and five-year fixed-rate mortgages are at the lowest levels ever seen, and trackers are at equally low levels."
While the base rate is still so low, lenders need to offer competitive deals to lure consumers. Once that rate begins to rise there will be less need to be so competitive. Canny consumers are aware of this and are exploring what's on offer now.
"Clients have finally become more serious about securing a new product before the inevitable rate rises kick in," says Andrew Montlake, communications director at brokerage Coreco Group. "And media scare stories have played their part. This has helped to hurry people into remortgaging before rates rise, house prices fall, or the criteria get too prohibitive."
With lenders demanding hefty deposits and the likes of self-certification and interest-only mortgages becoming a thing of the past, the worry is that the standard lenders will expect borrowers to meet could become too high.
Other factors to consider
But it's not just the possibility of a rate rise that could affect your decision to remortgage in 2011. Experts are predicting another drop in property prices next year. Rightmove's House Price Index shows prices fell by 0.4% over the course of 2010, and this looks set to continue. Capital Economics predicts a drop of 10%; the Office of Budget Responsibility a 3.1% fall; and Hometrack 2%.
Melanie Bien, a director at Private Finance, warns that a fall in property values could push borrowers into a higher loan-to-value (LTV) bracket, which will mean higher repayments. "Generally speaking, for every 5% increase in LTV, you pay an extra 0.5 percentage points on the rate," she says.
"If you have a very high LTV it may also mean you can't remortgage at all, so you'll be stuck on your lender's SVR, which of course will rise as the base rate does - and potentially by a greater amount."
So what's the best option for you?
When deciding whether to stick with your lender's SVR, fix your mortgage or opt for a tracker, you have to examine your attitude to risk.
SVRs offer little security. The rates are set at the lenders' discretion, and there's nothing to stop a lender increasing its rate at any given time; nor does it have to reduce it in line with the base rate.
Customers at Skipton found this out the hard way earlier last year when the building society put its SVR up by 1.45% in January, to 4.95%, despite the base rate being held. Not only did this move upset its borrowers, but it also broke Skipton's promise of never having an SVR more than 3% above base rate.
Like SVRs, tracker mortgages follow the base rate, but unlike SVRs they can't be priced at lenders' discretion. The rate will rise with the interest rate, but it's the speed of the interest rate rises that will matter to borrowers.
If you opt for a tracker, Cheltenham & Gloucester offers a two-year deal at 75% LTV with a rate of 2.19%. For a 90% LTV deal, Nationwide offers a two-year tracker at 4.63%.
Fixed rates offer the most security, and there are some good deals available at the moment, although some have pretty strict lending requirements.
NatWest, for example, offers a two-year fixed deal at 2.75% and 60% LTV - however, it's only available to those customers who hold a current account with the bank. Santander offers a similar deal at 2.65% for 60% LTV, while Hanley Economic Building Society's range includes a two-year fix at 75% LTV, with a rate of 2.85%.
If you're looking for a higher LTV deal, expect to pay a higher rate. Loughborough Building Society offers a three-year fix at 90% LTV, but with a rate of 4.99%.
Rates can and do change overnight, so if you find the right rate for you it's important to move quickly.
It's also important to look around at the wider market. Jonathan Cornell, spokesperson for IFA First Action Finance, says borrowers should see what their current lender can offer them but not be too concerned about staying loyal to it.
"Loyalty is a two-way thing," Cornell warns. "If your lender is prepared to offer you a new fixed or tracker rate, compare it with what you can get elsewhere. If there isn't a huge difference, it's probably worth staying put and avoiding the need to remortgage.
"If your lender is not prepared to offer you anything other than the SVR, then you should be able to find a better rate elsewhere."
Some of the least competitive products on the market include a two-year fixed rate at 7.09% from Cheltenham & Gloucester (90% LTV) and a three-year fixed rate from Halifax at a massive 7.39% (80% LTV).
It's vital, then, to look around and ensure you're as informed as possible. Slade says: "Brokers can provide a valuable service in helping borrowers find the best deals.
"However, borrowers should also do their own research, as many of the best deals are available direct from lenders. Shopping around is key to ensuring you get the best deal for your circumstances."
All rates correct as at 10 January 2011.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.
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.
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).
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.
Confederation of British Industry
The CBI promotes the interests of its members, some 200,000 British businesses, a figure that includes 80% of FTSE 100 companies and around 50% of FTSE 350 companies. Formed in 1965, it’s the lobbying organisation for UK business on national and international issues and seeks to influence the UK government to help businesses compete effectively.
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.