How to avoid becoming a mortgage prisoner
With interest rates bound to rise eventually, homebuyers should start thinking now about the best way of not suffering a financial shock, says Simon Read as he consults the experts
With warnings that more than two million households are in danger of becoming mortgage prisoners when interest rates rise, what can you do to avoid disaster?
The rule is to prepare now for future rises. If you can find an affordable fixed-rate deal, that will give you the certainty of knowing how much monthly repayments will be for up to 10 years ahead. And if rates rise rapidly you'd end up saving a fortune in interest charges.
If you're already on a good deal, you could start to prepare for future rate rises – and increased repayment demands – by making monthly overpayments now, if your deal allows you to. Then when rates do go up you won't experience rate shock. And the overpayments will have cut the amount you owe on your mortgage, which means you'll save future interest charges and potentially be able to remortgage at a better rate because you have more equity in your home.
We asked mortgage experts what you should be doing if you're worried about future rises…
What should I do if I'm on a standard variable rate?
"Those on a typical standard variable rate [currently around 4.75 per cent] should be considering a move to save money," advises David Hollingworth of London & Country Mortgages. "However they can also take the opportunity to build in some protection against future rate rises. It's still possible to fix for five years at just below 3 per cent. Norwich & Peterborough BS offers a five-year fix at 2.98 per cent to 75 per cent loan-to-value with a £1,295 fee.
"Some borrowers will be on lower SVRs and may be reluctant to give up on these rates [such as the old Nationwide base mortgage rate, currently 2.5 per cent]. They could perhaps give themselves a stress test to see how comfortable they would feel if rates were to rise by a certain margin. That may point them toward a fix but even if they stay put on the variable deal they could look to overpay in the meantime to make the most of the low rates and pay down the mortgage more quickly."
Mark Harris, of SPF Private Clients, says: "Compare your SVR with the alternatives. If your SVR is 5.99 per cent or more, there are plenty of cheaper fixed-rate options. However, those sitting on historic super-low SVRs may find that the long-term fixes out there are less attractive so may decide to stay put for now and benefit from that cheap rate for longer.
"If you do this, consider overpaying with the money you are 'saving' each month; this will reduce your outstanding mortgage faster plus ensure you get used to paying a higher mortgage amount each month for when you do move on to a higher fixed rate."
Ray Boulger of John Charcol says: "Providing you have at least 10 per cent equity in your property and you don't plan to sell your home in the near future, switch to a fixed rate. Although a little dearer than two- or three-year fixes, five- or 10-year fixed rates offer protection from when rates are actually likely to rise. It is now possible to get a 10-year fixed rate with early redemption charges for just the first five years."
What should I do if I've got three to six months to go on a fixed-rate mortgage?
Adrian Anderson of Anderson Harris says: "Ideally, you should already be looking around to see what sort of product you can get at the end of your fixed rate. Speak to an independent broker to see what options are available, particularly if your income has fallen or you've become self-employed since taking out the mortgage.
"If you have an interest-only mortgage, the options will be more restricted than they were when you took out your loan, particularly if you have a high loan-to-value. With the new Mortgage Market Review rules, lenders will be looking closely at outgoings so start reining in any non-essential spending to improve your affordability."
Boulger says: "Most mortgage offers are valid for between three and six months and, in any case, it is currently usually taking at least two weeks to get a mortgage offer, so it is not too soon to apply for a new fixed rate."
Hollingworth says: "This type of borrower should be very focused on what they want to do at the end of their current deal. Gathering together paperwork and understanding the breakdown of their income will be helpful when applying for a new mortgage, especially under the new MMR rules. A mortgage offer will typically be valid for three to six months so it makes sense to commence the application process in advance of the current deal ending, in order to secure a deal and ensure a smooth move across once the current deal expires."
What should I do if I've got six to 12 months to go on a fixed-rate mortgage?
Boulger says: "Start getting advice on the fixed-rate options when the period left on the current deal has fallen to seven months."
Hollingworth says: "This borrower will soon find that they will be ready to remortgage and should be thinking ahead so that they can make a smooth switch to a new rate. In the meantime they may also find that there are some expenses that they can seek to reduce, such as paying off other debt commitments like credit card balances or personal loans. Reducing outgoings will make it easier to meet affordability requirements now in place."
Harris says: "If you have several months to go before your mortgage deal reverts to SVR, shop around and reserve a product to complete on in six months. During that time you should ensure that your personal paperwork is in order, such as payslips, P60s, SA302s for the self-employed, interest-only repayment strategies and so on."
What should I do if I've got a year or two to go on a fixed-rate mortgage?
Anderson says: "With mortgage offers generally lasting six months, it is too early to apply for a new deal. However, it isn't too early to take a look at your financial situation and see whether it can be improved. Consider overpaying each month to take advantage of a relatively low interest rate and improve your equity stake in the property for when you come to remortgage.
"If you have an interest-only mortgage with no repayment vehicle in place, think about how you will repay the loan as any lender will want to see evidence of this when you come to remortgage. Consider whether you have savings that would be put to better use in reducing the loan-to-value on your mortgage to make you more attractive to lenders when you do come to remortgage."
Harris says: "Most fixes will carry early repayment charges during the fixed-rate period. These vary from lender to lender. Although cheaper fixes may be available, unless the lender waives the ERCs then the penalty incurred will offset any potential savings so you may as well stay put for now."
Hollingworth says: "The approach for these borrowers with longer fixed rates will be largely the same. They could consider whether it would make sense to switch away from the existing deal to a fixed rate but that needs to be approached carefully. The existing deal is likely to carry an early repayment charge, which could amount to thousands of pounds. Moving to a new rate now could give protection for longer but the benefit could be wiped out by any early repayment charge that applies.
"If it isn't worth switching it makes sense to consider overpaying in the meantime. Most deals allow some overpayment to be made without an early repayment charge, typically as much as 10 per centa year. This will help to reduce the level of mortgage debt and put them in a better position when it is time to review the rate."
Boulger says: "As rates will probably not increase much over the next year, it is unlikely to be worthwhile paying early redemption charges to come out of the fixed rate early. I would advise assessing options when the period left on the current deal has fallen to seven months."
What should I do if I've got three years or more to go on a fixed-rate mortgage?
Anderson says: "Congratulations – you've got certainty for a reasonable period of time. However, you shouldn't rest on your laurels as when you do come to remortgage in three years the chances are rates will be higher so your mortgage will cost more. Put yourself in a stronger financial position by overpaying each month if you can and reducing your outstanding mortgage.
"With most lenders letting you overpay by up to 10 per cent of the mortgage each year, if you are thinking about going self-employed now is a good time as most lenders will want to see at least three years' worth of accounts when you come to remortgage. So you would be giving yourself time to generate these."
Boulger says: "Get advice from a good independent mortgage broker as in a few cases it can be worth paying the early redemption charge to switch to a new rate. For example, a fixed rate taken out two or three years ago might have been at a particularly high rate because at that time the loan-to-value was very high.
"With some of the mortgage since paid off [assuming a repayment mortgage], plus factoring in the recent increase in house prices, it might be worthwhile paying the early redemption charge to switch to the cheaper rates available at lower loan-to-values.
"Some borrowers with a tracker mortgage which has early redemption charges will have what's called a drop-lock option, which allows them to switch to one of their lender's fixed rates without incurring the charge. That could be a good option."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 2 How the language you speak changes your view of the world
- 3 Russell Brand backs Ed Miliband: 'You gotta vote Labour'
- 4 General Election 2015: 14-year-old boy asks Nick Clegg – 'can you kill Katie Hopkins?'
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: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
In defence of liberal democracy
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
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