Back to reality for tracker rate borrowers
People with sub-base-rate loans have gained hugely from the credit crunch, but now the bumper deals are coming to an end. Alessia Horwich reports
Sunday 11 October 2009
The days of the 0 per cent mortgage are coming to an end. Borrowers who took out sub-base-rate tracker deals in the final throes of the bull market have been enjoying paying little or no interest.
But as two-year fixed periods come to an end, many are facing a massive rate shock as the interest repayable on their loans rockets by as much as 6 per cent. Borrowers now need to decide whether to fix quickly before rates rise or take a gamble on their lenders' SVR. Either way, with eroded equity and tight lending, borrowers are looking at rising costs and stretched budgets.
In the late summer of 2007, new tracker deals came on to the market with interest rates ranging from 0.26 per cent below Bank of England base rate (from Saffron Building Society) to as much as 1.01 per cent below (Cheltenham & Gloucester). While these were competitive deals, the sharp drop in the Bank of England base rate from 5 per cent to 0.5 per cent in six months meant those who had had the fortune to take one out went from paying over 4 per cent to paying very little or no interest. "These deals looked good at the time," says Richard Morea, a technical manager at mortgage broker London & Country, "but with the fall in base rate they've been tremendous."
However, the two-year fixed period for many of these deals is now coming to an end; as deals revert to the lender's standard variable rate (SVR) or underlying rate, repayments are set to rise. Halifax customers who took out their offering at 0.51 per cent below base rate for two years saw their deal end on 30 September; for those with a £150,000 loan, monthly repayments will rise from £544 to £792 on the SVR of 3.5 per cent, a hefty increase. Those who have chosen to overpay won't feel hikes as acutely. Eleanor Ross, a spokeswoman for C&G, says, "We've seen many customers maintain payments at the level they were before the base rate fell so dramatically, so the payment shock may not be as much."
For those facing the imminent end of their sub-base-rate tracker honeymoon, there are two choices: to stick with the SVR or not to stick. For many, reverting to the lender's SVR might not be the calamity it was pre-credit crunch. The base rate remains low and many lenders are offering attractive SVRs from 2.50 per cent. Other deals revert not to the SVR but to a rate comprising base rate and a fraction of a per cent. Again, some of these deals remain extremely competitive: Alliance & Leicester will automatically put customers who took out a tracker in July 2007 at base rate minus 0.31 per cent on a rate of base rate plus 0.99 per cent, which currently works out at 1.49 per cent. A deal like this is worth sticking with, at least for now.
Another advantage of the SVR is that it will not come with arrangement costs attached. For those whose equity has been squeezed by falling house prices, staying on the SVR may also give access to rates unattainable if you chose to remortgage. Lenders are still looking for big deposits, and staying on the SVR for at least a short while will give you a chance to chip away further at your loan. Alternatively, sitting on your SVR may give your house price time to recover slightly. You can then look at remortgaging once you are in a better position.
But even if the SVR is competitive and fee-free, you must be prepared for increasing payments at some point. As Melanie Bien, a director of Savills Private Finance, says: "If you are going to stick with the SVR you should have an income that can cope with price increases as rates are almost certainly going to rise." Once they do, fixed-rate deals will already have pre-empted the move and will be more expensive than presently. Borrowers may choose to stay on their relatively low SVR for now, but eventually they will want to switch. Unless they time it right, they could end up paying significantly more when it comes to it.
Not everyone has the choice of sticking with their current deal. The variation of SVRs across different lenders is wide. While some banks and building societies have made pledges not to raise SVRs above a certain threshold, others are pushing them up to compensate for losses made on retail savings accounts priced competitively to bring in savers. The outcome is that SVRs range from a low 2.50 per cent to 6.45 per cent – higher than average fixed-rate deals available on the market. "If you are on a low SVR it's attractive to keep it," says Ms Bien. "But if it is one that's higher you might as well try to find a fixed rate because you could get a better deal elsewhere."
For those with a good amount of equity, remortgaging is a viable option. Lending has softened over the past weeks, and although the best rates remain exclusive to those with about 60 per cent loan-to-value, there are now better deals for borrowers with 25-30 per cent equity. However, if your equity has been eroded by plunging house prices, or you are in negative equity, remortgaging is going to cost you. "Beyond 75 per cent LTV there is not as much competition or choice, as lenders are less keen to be going there," says Mr Morea. Rates on higher LTV deals jump around 2-2.5 per cent immediately which would leave people paying more than five times what they were for their trackers. Remortgaging also comes with other costs. The early redemption period on the tracker deal may have ended, but lenders can still charge exit fees as well as the usual mortgage fees.
"People who took the gamble on these sub-base-rate trackers have done superbly well," says Mr Morea, "but its unlikely that these circumstances are going to be repeated and the decision is going to be more difficult this time round. There are still low rates to be had, but paying so little for the past two years makes any new deal a harder pill to swallow."
Worse off by £300 a month
Anita Anderson, 39, from east London is on an Abbey tracker mortgage at Bank of England base rate minus 0.36 per cent fixed for two years. The mortgage will revert to SVR in January, currently 4.24 per cent.
"Each time the rate has dropped, I have paid off more capital. But if I stayed on the SVR, once rates start to rise the fun will be over. As a result, I've significantly reduced the amount outstanding and shortened the term of my mortgage from 30 to 18 years.
"However, reverting to SVR will cost me about £300 per month extra. Plus, if I don't find a better deal, I will be back to paying off the mortgage over 30 years again.
"Rates can only go up, so I'm not going to gamble again. I'd like to know exactly how much will come out each month for the foreseeable future so while they remain quite low, I'd like to fix for as many as five years. Luckily I've built up quite a lot of equity so I hope this will give me the flexibility to find a good rate."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Q&A: What’s the best way to invest for our baby?
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
General Election 2015: How you vote next week could affect your finances
Motorists will need a code to hire a car abroad
- 3 How the language you speak changes your view of the world
- 4 Russell Brand backs Ed Miliband: 'You gotta vote Labour'
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park