Can you cushion the blow when the cheap loan leaves home?

Many borrowers face soaring repayments as fixed deals come to an end. Laura Howard looks at their options

The latest cut in interest rates will not be enough to stave off the payment shock that awaits the estimated 1.8 million borrowers coming off cheap fixed-rate mortgages this year.

The very best in today's market is Yorkshire building society's two-year deal priced at 5.09 per cent interest with a £995 fee, according to financial analyst Moneyfacts. But this still doesn't compare well with Portman's equivalent deal two years ago: 4.3 per cent with a £499 fee. So even a homeowner who has bagged both these fixes will be £90.61 a month out of pocket on a £200,000 repayment mortgage.

And the hurdles don't end there. In the new, tighter lending landscape, access to providers with the best deals has become more restricted, says Melanie Bien, director at mortgage broker Savills Private Finance. "The credit crunch is making it harder to get funding, particularly for those with blips on their credit histories. It may be the case you can't remortgage to another lender anyway."

But sticking with your current provider after your cheap home loan has come to an end is itself a case of hit and miss, although many borrowers will be better off now than they used to be. In the past, they would have simply been transferred to their lender's expensive standard variable rate (SVR), currently averaging 7.41 per cent, Moneyfacts reports. In the past few years, however, lenders including the Halifax, Abbey and Nationwide have introduced "retention rates" to persuade customers to stay.

Andrew Montlake, a partner at broker Cobalt Capital, says: "Lenders can be pretty guarded about these rates as what they really come down to depends on how much a lender wants to retain that borrower's business. But typically, they are priced between 0.3 and 0.5 per cent higher than those mortgage rates available to new customers."

For example, according to research from Savills Private Finance, customers new to the Halifax can net a two-year fix at 5.67 per cent, while existing borrowers would have to pay 5.74 per cent. There is also a higher arrangement fee for existing customers switching to a new fix – £1,499 compared with £999 – and they will have to fork out for legal and valuation fees, from which new borrowers are exempt.

Some lenders are trying to buck this trend by offering short-term incentives to retain customers coming off cheap deals. HSBC, for example, has promised to match the price of any fix that draws to a close between 1 February and the end of April. This rate can then be taken for a further two, three or five years.

However, borrowers will pay a fee for the privilege, and this will vary according to the size of the loan and how low the fixed rate was in the first place. In exceptional circumstances, the borrower may be refused, admits HSBC spokes- man James Thorpe.

"In effect, then, you come back to the same grey area surrounding retention-rate policies," says Ray Boulger, technical manager at broker John Charcol. But Mr Thorpe says that, so far, 93 per cent of borrowers have paid a fee of £500 or less.

For overall long-term value, the Woolwich makes its whole range of mortgage deals available to all borrowers – new and existing. "And even if a borrower has not managed to arrange a switch before their existing deal expires, they will be transferred to a special tracker deal of base rate plus 0.95 per cent instead of our SVR," says Woolwich spokes- man Andrew McDougall.

But in the vast majority of cases where retention rates are employed, borrowers should be wary of accepting the first deal they are offered by their existing lender, as they will almost always find better rates elsewhere. And according to Mr Boulger, most "prime" borrowers – if they have looked after their credit rating – should not have trouble remortgaging to these deals.

On the other hand, there are circumstances where it would make sense to stay with the same lender and opt for its retention rate, says Mr Montlake. "The first is if your financial situation has changed, such as you have become self-employed, earn less or have damaged your credit rating. This is because when you transfer products but stay with the same lender, a credit check will not be carried out. Second, if you are in a hurry, staying put can mean you transfer to the new deal immediately instead of waiting over three weeks to switch lenders."

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