Are your mortgage payments about to go through the roof?

With interest rates likely to rise, now's the time to get your calculator and find yourself a better deal, says Kevin Rose
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The Independent Online

If you haven't reviewed your mortgage product recently you may unwittingly be throwing away thousands of pounds. Borrowers sitting on their lender's standard variable rate (SVR) may think they have the lowest monthly repayments possible, but that isn't necessarily the case. Not all lenders' SVRs are competitively priced; there could well be be cheaper fixed-rate and tracker mortgages available.

The Bank of England's Monetary Policy Committee has kept the Bank Base Rate at a record low of 0.5 per cent for 22 consecutive months, which has resulted in the hitherto unimaginable scenario of borrowers paying less by being on an SVR. But with inflation now at 3.7 per cent – almost double the government's 2.0 per cent target – many commentators are predicting that the Bank Base Rate will rise over the coming months as the Bank of England tries to reduce inflation. People with variable rate mortgages such as trackers, who are worried about rising mortgage repayments, should consider moving to a fixed-rate mortgage. This will give them consistency with their repayments and insulate them from the effects of base rate rises during the fixed term.

However, "swap rates" – which equate to the rates mortgage lenders themselves borrow money at – are rising too, meaning the costs of fixed rate mortgages may go up soon. Indeed, many lenders are withdrawing fixed-rate products or making them more expensive, so if you're looking to move to a fixed rate you should do so quickly.

Comparison website moneysupermarket.com has calculated that a borrower with a 25-year term, £150,000 repayment tracker mortgage at 2.17 per cent (the average rate of the top five two-year tracker mortgages listed on its site) will currently be paying £648 a month. A 0.25 per cent increase in Bank Base Rate would see their repayments increase by £19 a month. A one percentage point rise would mean that they would be paying £725 a month, an increase of £77.

The vast majority of fixed-rate mortgages have early repayment charges (ERCs), meaning borrowers will be penalised if they try and get out of the deal during the fixed period. That's not to say it's never worth paying the ERC – you might find switching from a long-term fixed rate will work out cheaper in the long run – but before taking out a fixed rate it's important to think about what length of fixed term best suits your circumstances.

The two-year deal has long been king of the fixed rates, but longer-term deals have been gaining in popularity. You will pay more for longer-term deals, so you need to work out how much you are willing to spend for the peace of mind of knowing exactly how much you will be paying in two, five or even 10 years' time, regardless of what happens to Bank Base Rate.

Ray Boulger, of John Charcol, still believes the tracker market offers better value for now, and doubts whether fixed rates can get any cheaper. He says: "If you have been waiting for the bottom of the pricing market, we are probably here. If you are paying a lender's SVR of 3.5 per cent or over, and have 15 per cent or more equity in your home, then you are very likely to get better value by switching to a new product."

It is important to look at all the costs associated with a mortgage and not just the interest rate. Many so-called "best buy" tables are calculated solely on headline rates and not from looking at the total cost of a deal. Mortgage arrangement fees, for instance, can vary from nothing to around £2,000. When taken into consideration they can make a headline-grabbing deal look decidedly less attractive.

Other fees to look out for include "booking fees", "completion fees" and "exit fees". Some are non-refundable so if you accept a mortgage offer but do not go ahead with it, the mortgage firm in question will keep your cash.

Research just published by consumer group Which? has revealed that both the number and the level of fees have gone up since the financial crisis, with four in five two-year tracker mortgages for up to 90 per cent of a property's value charging over £990 in set-up fees in 2010, compared with one in five in 2007.

Arrangement fees are sometimes due on completion and sometimes added to the mortgage – in which case you will be charged interest on the arrangement fee for the term of the mortgage.

On the flip side, some lenders will offer "fee-free" deals, which typically means they will pay the costs of any legal fees and valuation fees associated with the remortgage.

Whatever type of mortgage you opt for will become cheaper the lower the loan to value (LTV). Before the credit crunch, 100 per cent mortgages were widely available, with the likes of Northern Rock – under certain circumstances – prepared to lend up to 125 per cent. The pendulum has now swung firmly in the opposite direction. Independent mortgage broker Mortgage Advice Bureau has reported that of all remortgage applications it processed in 2010, the average LTV was just 53.8 per cent.

If you are remortgaging, lenders may take into consideration any unsecured borrowing you have and will look at your credit history. Unlike in the pre-credit crunch "Naughties", when an adverse credit record didn't disqualify you from a mortgage, lenders now take a dim view of missed payments.

If you are looking to make savings on your existing mortgage, you should consider making monthly overpayments; indeed, if your deal won't let you overpay, that's another reason to consider switching mortgage.

You can knock thousands of pounds off the total amount you will repay to your mortgage lender by consistently paying more than the required monthly amount. If your lender allows overpayment of any kind, it will probably let you pay up to 10 per cent a month without incurring any penalty.

Andrew Hagger from comparison website Moneynet.co.uk highlights the sort of savings you can make, based on a £150,000 repayment mortgage with 25 years to run at 3.75 per cent, where the monthly payments are £771.20.

Hagger says that if you pay an extra £50 a month you will clear your mortgage two years and five months early and save £8,800 in interest charges. And if you can manage to pay an extra 10 per cent (ie £77.10) a month, you will clear your mortgage three years and seven months early and save £12,795 in interest.

Several lenders have been trailing 50 per cent penalty-free overpayment facilities. If you are fortunate enough to be able to afford to pay 50 per cent extra (£385.50 per month) you will clear your mortgage 11 years and two months early and save £38,991 in interest charges, says Hagger.

It is imperative that any borrowers on interest-only mortgages seriously consider whether it is still the best option for them. Unlike a repayment mortgage, where you pay off capital and interest each month, with an interest-only deal the monthly payments only cover the interest on the amount you owe, so the outstanding mortgage is not actually being reduced.

An interest-only borrower will need to put money into an investment vehicle (such as an ISA or endowment policy) to repay their mortgage at the end of the term.

A number of borrowers switched to interest-only when the recession hit, as they struggled to meet their (capital repayment) mortgage commitments. However, they will only be increasing the total cost they will pay over the whole term. Andrew Hagger illustrates just how much interest-only can cost. Using the same £150,000 mortgage example as before (at 3.75 per cent over 25 years with a total cost of £231,360), if you went for interest-only for the first five years and then switched to capital and interest for the remaining 20, he calculates your payments would be 60 months at £468.75 followed by 240 monthly payments at £889.33. That's a total cost of £241,564, or £10,204 extra.

Even worse, if you opted for interest only for the first 10 years and then capital and interest for the remaining 15, your payments would be 120 months at £468.75 followed by 180 monthly payments at £1,090.83. This adds up to a total cost of £252,599 – a staggering £21,239 more than you'd have paid with a 25-year repayment mortgage.

Many lenders have removed interest-only options from their mortgage portfolios and some no longer allow borrowers to stay on interest-only once the fixed term is over. Also, regulators at the FSA have indicated that they could seek to outlaw interest-only mortgages altogether. Whether this happens or not, it's vital that interest-only borrowers don't get mesmerised by their very low mortgage repayments. There's a very good reason why they're so cheap: they're not paying off the capital.

Now is the time to get the calculator and work out what you could soon be spending in mortgage repayments. With interest rates only likely to go up and fixed rates becoming more expensive, you should research the market and decide what's best for you. You never know, you could be pleasantly surprised.

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