Mortgage experts are urging homeowners to ensure they protect their finances as soon as possible from future interest rate rises.
They believe most borrowers should lock into a fixed rate mortgage ahead of an increase in base rate by the Bank of England. Such a move could come as early as next month. If so, it would be the first notch up since July 2007 when base rate increased to 5.75 per cent.
Although the Bank has yet to press the trigger, banks and building societies are already tickling up the price of new mortgages in anticipation. In the past few days, Barclays, Halifax, digital bank Atom, NatWest and building societies Nationwide, Skipton and West Bromwich have all increased the cost of selected loan offers. Other lenders are expected to follow suit.
Mortgage experts are urging homeowners to ensure they protect their finances as soon as possible from future interest rate rises
This is bad news for buyers and those looking to remortgage as their current deal comes to an end.
But the cost of existing home loans will not change until base rate rises – and then only borrowers with a loan linked to a variable rate of interest will see their monthly payments rise.
David Hollingworth, mortgage expert at broker London & Country, says the recent increases are not a reason to panic. But he believes borrowers who have held off from taking action so far should rethink.
He adds: ‘As more rates increase, it is likely other lenders will succumb and follow suit. It can fast result in a domino effect rippling through the market. There are still some extremely low mortgage rates on offer so borrowers can lock in their rate at a favourable price.’
For borrowers looking to take advantage of a competitively priced loan before a base rate increase, these are the key facts to absorb:
Do not wait for your current deal to end
Borrowers do not have to wait for their mortgage deal to end before hunting for a new one. Indeed, it pays to start the remortgage process at least three months before an arrangement such as a fixed rate expires.
In taking such pre-emptive action, homeowners will ensure a smooth transition from one loan deal to another – and avoid temporarily being put on an existing lender’s higher standard variable interest rate. For those with just a few months left on their existing deal, acting now should also enable them to get a new loan before prices rise in response to an increase in base rate.
Some lenders, including Barclays, Tesco Bank and building societies Skipton and Yorkshire, allow new borrowers to agree to a deal six months ahead. The drawback of such an approach is that any up front fee will not be refunded if a borrower fails to go ahead with the remortgage. Also, it can reduce the length of any new deal because many fixed rate loans run to a set date.
CASE STUDY: Peace of mind for five years
Jeremy and Joanne O’Connell have just secured a fixed-rate mortgage deal that will bring them peace of mind for the next five years.
The couple, who live just outside Loughborough in Leicestershire, have locked into a five- year fixed rate loan from Tesco Bank at 1.88 per cent.
Jeremy, a 47-year-old electrician, is delighted the new loan means they can now budget with a degree of certainty.
Joy: The O’Connells have financial security
The rate is half the 3.79 per cent fixed rate they were previously locked into. But the couple have taken the new loan to reduce the mortgage term and borrow a little more to do some home improvements on their four-bedroom detached home.
The result is that their monthly payments will increase slightly.
Jeremy says: ‘In an uncertain world, it is good to build certainty into your household finances.’
Ray Boulger, at broker John Charcol, says: ‘If you have the opportunity to lock into a rate now, there is no point in waiting. The scope for rates to fall is negligible.’
Speak to your lender – then shop around
Ahead of a special rate coming to an end, an existing lender will usually offer a borrower a choice of new deals – for example, a fixed rate over two or five years.
In terms of ease, these are the best options as a new deal can often be secured online without speaking to the lender. But they will not be the cheapest. Shopping around, either on a do-it-yourself basis or via a mortgage broker, often results in a better outcome.
Choose any fixed period carefully
With interest rates only likely to move up in the coming months, a fixed rate loan makes best sense. Deals are available ranging from two through to ten years.
In general terms, the shorter the fixed rate period is, the lower the rate will be. For example, someone looking to remortgage a loan of £150,000 where they have ten per cent equity in their home could secure a two-year fixed rate from Co-operative Bank at 1.79 per cent. If they wanted to fix for ten years, Nationwide Building Society would offer a rate of 3.89 per cent.
Hollingworth says: ‘Five to ten- year fixed rates may be more expensive but they could offer financial security if interest rates start climbing and there is political and economic uncertainty.
‘Ten-year deals are ideal for those who are not expecting to move in the foreseeable future – either because they have just started a family in a home they feel they will live in for a while or are keen to see out the remaining ten years of their mortgage without worrying about the ups and downs of interest rates.’
Most fixed rate deals carry early repayment charges. These apply for the whole fixed period.
Boulger says two-year fixed rate loans may appeal to those who have little equity in their home. This is because after two years, they will have built sufficient equity to get a better rate.
Take into account arrangement fees
Borrowers should not be tramlined into thinking the deal with the lowest interest rate is cheapest. Often cut-price deals come with three or four-figure arrangement fees, which can make them costlier than loans with a slightly higher interest rate but no fees.
For example, someone looking to remortgage a £100,000 loan (repayment, 25 years) – where they have 40 per cent equity in their home – may be tempted to opt for a five-year deal from Sainsbury’s Bank priced at 1.59 per cent in preference to a similar deal from Tesco Bank at 1.83 per cent.
But over the five-year period, they would actually pay less with Tesco (£24,938) than Sainsbury’s (£24,996) because the former charges no arrangement fee while the latter levies a £745 fee.
If someone was looking to do a £200,000 remortgage, the Sainsbury’s five-year fixed rate deal would work out cheaper – £49,247 against £49,875 with Tesco. In general terms, the lower the remortgage size, the more attractive are loans with no set-up costs.