How to review your mortgage deal
Over half of mortgage holders believe interest rates will change in the next nine months, according to recent research from the Consumer Finance Education Body (CFEB).
Despite this, 54% of those with a mortgage have no plans to review their deal, or say they will leave it to the last minute to do so.
But when it comes to your mortgage, getting a good deal with a competitive interest rate can save you hundreds. For instance, at 4% your £150,000 repayment mortgage will cost you around £791 a month.
But, get a rate of 2.25%, and repayments fall to £654, saving you £137 a month or £41,100 over a 25-year term.
"Although there are exceptions, especially in the low interest-rate environment, the rate your lender will put you on at the end of a deal, known as the standard variable rate (SVR), is usually higher than most of the deals you can get," says David Hollingworth, mortgage expert for broker London & Country.
"So, if you're on your lender's SVR, check whether you could get a better deal."
"Your lender doesn't want to lose your business, so often it'll be able to offer you another deal," he explains.
"You will usually have to pay an arrangement fee but it's worth asking." Alongside speaking to your lender, it's worth doing some research to check how competitive its deal is.
"Don't only look at the interest rate, look at the arrangement, valuation and legal costs and the exit fees on your existing mortgage too," says Hollingworth.
Also think about the type of mortgage you want, as this can be a lifestyle as well as a financial choice. There are four main types of mortgage: fixed rate; discounts; tracker; and flexible.
Fixed-rate mortgages offer you a set rate for a set term, which could be anything from one to 10 years.
This gives you the security that your repayments will be the same every month whatever happens to the base rate but, in theory, means you could end up paying a higher rate if more attractive deals come onto the market.
Discounted-rate mortgages give you a rate that is based on the lender's SVR but, as the name suggests, a number of percentage points below it usually for a fixed period.
Monthly repayments will vary in line with any changes to the provider's SVR, but you have the security that you're paying less than the SVR. Discounted mortgages often include early repayment charges if you remortgage with the discount period.
Tracker mortgages work on a similar basis, but the interest rate is a set percentage above the base rate. This means the rate will change when the base rate changes.
With both discounted and tracker mortgages, the deal can last a set term or for the lifetime of the mortgage.
Flexible mortgages, which include current account and offset mortgages, are a bit different. These use the money in your current and savings account to reduce the size of your mortgage, enabling you to pay off your mortgage more quickly.
Rates tend to be slightly higher than the other deals but if you've got savings languishing in a low-interest rate account, it could offer good value.
The flexibility also suits people with variable incomes as you can overpay or draw money out as required.
Whichever type of mortgage you decide to move to, it can take around two months to get all the paperwork sorted.
"If you're on a deal, start looking about three months before it comes to an end to prevent yourself paying the higher SVR rate," says Hollingworth.
What will happen to the base rate?
With the Bank of England base rate at 0.5% since March 2009, the only way is up – but the question is when?
Hollingworth believes it's unlikely to be this year: "The current state of the market suggests it won't be rising too rapidly. There was talk of an increase this year but I suspect it won't happen until 2011."
His view is echoed by David Doulton, director at Fair Investment Company.
"Some economists have been predicting a substantial rise by the end of the year to counter inflation, but although inflation of 3.4% is a concern, raising the base rate would have a negative impact.
Rates most likely won't change this year, and probably not in 2011 either," he says.
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 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.
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.
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.
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.
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).
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