youUnless your mortgage is already fixed for the long term, this week’s rise in interest rates, which closely follows December’s, has probably worried you. About 2 million borrowers have entered into variable rate agreements, and many of them have already seen an increase in their repayments following the last increase in the base rate. Thousands more are on fixed rate deals ending over the next few months.
With other rising living costs, remortgaging might be a good bet. Some people will be able to save over £200 per month, or over £2,000 per year, just by making a fairly simple change.
“Mortgages are the only aspect of good news here, because there’s still something you can do about the cost,” says David Hollingworth of broker L&C Mortgages. “You can ease the pressure elsewhere by taking appropriate action.”
What is “appropriate action” will depend on your situation, but you should at least start by looking at your current situation.
Do you pay your lender’s standard variable rate (SVR) and if so, how much does it cost? Are you on any special offer and if so when does it end? If you jump ship early, are there redemption fees to pay? These are fees charged by a lender when you pay off your mortgage before a special offer rate ends and are usually a set percentage of your outstanding mortgage debt.
If you are on a lender’s SVR
Chances are you’ve just been hit with an increase in your monthly bill linked to the Bank of England’s decision in December, and you’re now facing another 0.25 percentage point increase.
But not all borrowers still face higher costs. HSBC is a big lender that has not passed on the increase, and the Yorkshire Building Society also held its SVR.
The SVRs of these two countries are quite different: HSBC’s is 3.54%, while Yorkshire’s is 4.49%. If you’re on the latter, you could significantly reduce your monthly outgoings by upgrading to a better deal.
Hollingworth gives the example of Yorkshire’s SVR switch to a market-leading five-year fix at First Direct which has a rate of 1.54% and a fee of £490. This would reduce your monthly repayments by £222 and, over 12 months, it would save you £2,169 once you factor in fees.
However, if you slipped into SVR because your mortgage is coming to an end, you may not qualify.
“With a smaller mortgage, even low costs will start to eat away at savings,” says Hollingworth. “If you have, say, two years to go, you’d probably be better off looking to your existing lender to see if they can do a better rate for the remaining time.”
If you have a follow-up mortgage
You will certainly feel the effect of any rise in interest rates and you may be concerned about forecasts that the base rate could reach 1.5% next year.
It makes sense to shop around if your deal doesn’t have an early repayment charge (ERC) – unless you chose that deal because you wanted the option to pay it off early, or there was another why you wanted flexibility that still holds.
If you have ERCs to consider, check their amount. The percentage generally decreases as the end of the agreement approaches, so the longer you’ve had the mortgage, the less you’ll have to pay. But whatever you pay to escape the mortgage will have to be offset by savings. “You could end up out of pocket,” says Hollingworth.
Say, for example, you owe £150,000 and your mortgage has an ERC of 1% in the last year of the trailing rate, meaning you will pay £1,500 to move now.
For ERC to be worth paying, you have to think that rates are rising so fast that anything you can lock in at the end of your deal will cost you more than that over the duration of the next deal you sign on to. engage.
If you’re in the last year of your follow rate, you don’t have to wait until the end to close a new deal.
Many lenders allow you to lock in and finish six months later.
If you find a deal with free legal services and a free valuation and choose to add the arrangement fee to your mortgage, you won’t need to pay a dime now, says Nick Mendes of broker John Charcol . “If mortgage rates go up, you got a deal based on what’s on offer today, but you haven’t finished, so if they go down, you can ask for something else,” he says.
Hollingworth has a caveat: if it’s a new fixed rate, check what the end date is and “make sure you don’t encroach on the benefit period.”
If your fixed rate ends this year
You are currently sheltered from the upside, but you may be starting to worry about what will happen next.
You also have the option of requesting a new contract up to six months before you have to change. Be sure to check if the lender has such a long lead time before signing up.
Mendes says for anyone looking to remortgage, lenders have eased restrictions on self-employed loans, but are looking closely at affordability.
He warns that a flurry of immediate purchases and subsequent payments could pose a problem if you want to take out a new mortgage. “We’re starting to see household incomes stretch and if people turn to other forms of credit, that could cause them problems,” he says.
The affordable 10-year solution
The cost of locking in your mortgage for 10 years has fallen after Lloyds cut the rate on its 10-year solution to 1.66% for mortgagees.
Experts say it is the cheapest 10-year deal they can remember and could lead to other lenders offering similar rates over the same period.
The mortgage has a charge of £1,000 and a prepayment charge starting at 6% for the first five years, then gradually decreasing to 1% in the final year. It is available up to 60% loan to value. Movers can get a rate of 1.68% from Halifax through brokers.
“To hang for 10 years below 2% is incredible,” says David Hollingworth of L&C. Nick Mendes says some borrowers feel uncomfortable locking themselves in for so long because of fees if things change. However, the mortgage is transferable, which means that if you move, you can transfer it.