Find a new deal or be pushed into a bad one

Two-year fix coming to an end? Esther Shaw shows what to do
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The Independent Online

Hundreds of thousands of borrowers have a nasty surprise in store.

Hundreds of thousands of borrowers have a nasty surprise in store.

Around 450,000 homeowners whose two-year fixed-rate deals run out over the next few months face a hike in monthly repayments of more than £200, says the financial-comparison service MoneyExpert.com.

In the spring and summer of 2003, Bank of England base rates fell as low as 3.5 per cent and prompted lenders to offer competitive two-year fixes.

Although the average two-year offer was set at 4.23 per cent, it dropped to as low as 3.24 per cent with Britannia building society.

However, base rate rises and the threat of further hikes have since pushed the average fixed-rate deal up to 5.5 per cent.

This is bad news for borrowers looking for a new fix, and worse for those who fail to find one in time and slip on to their lender's standard variable rate (SVR) - averaging 6.64 per cent.

For example, a £100,000 mortgage at 4.23 per cent in 2003 cost £546 a month on a repayment basis, says Money-Expert.com. But find yourself switched to that 6.64 per cent SVR and your monthly repayments rise by £146 to £692.

"Many will be in a for a big shock," says David Bitner at broker Bradford & Bingley. But there are steps you can take to mitigate the effects.

Although rates on all products have risen, a remortgage planned well ahead of the end of your fixed deal will stop you making an expensive slip to your lender's SVR.

"Homeowners should start shopping around for a new deal about two months before their current fix ends," says James Cotton from mortgage broker London & Country.

Whether you go for another fixed-rate deal or choose a cheaper discounted variable rate will depend on your view of where rates may go.

Ian Giles of Purely Mortgages broker believes that a discount will be better value over two years than a fix.

However, some new, lower two-year fixes could be coming on to the market in the coming weeks, says Melanie Bien, associate director of mortgage broker Savills Private Finance.

This is because swap rates - those at which mortgage lenders borrow money from each other - have fallen below 5 per cent for the first time since mid-February, and could help lenders price cheaper deals.

If you decide to go for a discount, Mr Giles recommends a two-year rate from Portman building society of 4.48 per cent, while Mr Cotton picks out a two-year discount deal from Kent Reliance building society with a rate of 4.55 per cent.

When scouring the market, make sure you check the different lender fees charged; although many will offer free legal and valuation services, there are plenty that won't. Meanwhile, arrangement fees have been creeping up during the past few months as lenders try to claw back money on the cheap deals offered to borrowers.

Joe Tuckwell, 28, from Bath is taking steps to avoid a hefty jump in repayments when his two-year fix at 3.75 per cent with the Woolwich ends in June. Without action, he slips on to the bank's SVR of 6.79 per cent.

He is trying to sell his one-bedroom home to coincide with the June deadline, avoid an early redemption fee and pick up a new discounted deal afterwards. "I've been thinking about selling for some time, but the potential hike has prompted me to try to move now."

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