Play the waiting game at your cost

Holding out for a better rate when your mortgage deal ends can be expensive, says Stephen Pritchard

This is despite the fact that a large number of borrowers are coming to the end of cheap fixed-rate deals. Bradford & Bingley, the lender, estimates that 800,000 home owners are currently in this position.

Lower interest in remortgaging suggests that existing home owners are biding their time. Some may be waiting for interest rates to fall further: a cut in the Bank of England base rate to 4.5 per cent is widely predicted in the City. Others may be planning to move in the autumn, when the housing market should be more settled, and may not want to change their mortgage before then. But that could prove an expensive decision. Most home owners on fixed-rate deals will find that their mortgages revert to their lender's standard variable rate (SVR). A typical SVR is around 6.75 per cent. This is almost 2.5 per cent more than the best two-year fixed rate deals on the market, and higher than most tracker deals.

Lenders tend not to encourage home owners to shop around at the end of a mortgage deal, as charging the standard variable rate is profitable. And it often takes a few months' higher mortgage payments before home owners realise they are paying too much. "It takes a couple of bank statements before it registers," says Ian Giles, the marketing director of mortgage brokers Purely Mortgages.

Giles estimates that a home owner with a £100,000 mortgage will pay around £2,000 a year more on a lender's SVR than on one of the better rates in the market. Nationwide, for example, is currently offering a fixed rate for two years at 4.39 per cent, well below current base rates. So holding off for lower interest rates could be a false economy. Giles calculates that paying the standard variable rate for two or three months will outweigh the benefits of a 0.25 per cent fall in base rates, assuming a home owner remortgages for two years. The longer the delay - and the larger the mortgage - the higher the additional cost. Borrowers can hedge their bets by moving from an SVR to a tracker rate: the lowest currently on offer is at 4.6 per cent from the Saffron Walden building society. A tracker will automatically fall in line with base rates. Two 0.25 per cent reductions from the Bank of England, by no means out of the question if manufacturing output and high-street sales remain slow, would put trackers below the best of the two-year fixed-rate deals. Home owners should balance this against the risk that interest rates might not fall, and could even rise later in the year. The more attractive base-rate tracker mortgages tend to have tie-in periods with penalties. This usually applies when the initial mortgage rate is a discount on the Bank of England base rate. Anyone with such a mortgage will have to stay with it if interest rates go up, or pay a penalty in order to move to a fixed-rate deal; this risk has to be set against the cost savings, if rates do come down in the next few months.

Nor are there any guarantees that fixed-rate mortgages will fall much, even if base rates do come down. Although there might be some scope for longer-term fixed rates, such as five- and 10-year deals, to drop, lenders are already being aggressive with their prices for two-year fixed-rate loans. Those offering fixes of below 4.5 per cent may have factored in base-rate falls; there may not be much scope for further cuts.

But home owners who really do not want to fix now should still look at what is available, especially if they are paying the standard variable rate.

Not all SVRs are the same, and there are some penalty-free trackers. Intelligent Finance, for example, currently has a rate of 5.19 per cent with no early redemption penalties: cheaper than most SVRs, and with no penalties for switching, should rates head up, not down.