Short-Term Home Loans: When your cheap mortgage ends, trouble could begin
Next time you put a date in your diary, make sure you have also noted down a reminder of an appointment you can't afford to miss: the renewal of your short-term mortgage.
Although the Financial Services Authority (FSA) insists the rules for renewing one-, two- or three-year home loans are "working very well", mortgage brokers argue that confusion is costing borrowers dear.
"Technically, lenders aren't required to advise borrowers that a rate is coming to an end - although they do have to inform them that their interest rate, and therefore their payments, are due to change," says Andrew Montlake from Cobalt Capital. "Although this sounds like the same thing, there is a subtle difference."
If the change in monthly repayments isn't spelt out exactly - and the rise may well be steep - homeowners can easily overlook the need to sort out a new short-term deal rather than slipping on to the lender's expensive standard variable rate (SVR).
"If you had a £150,000 mortgage at a rate of 4.5 per cent, it would cost you £822.75 a month," says Nick Gardner of broker Chase de Vere Mortgage Management. "But if you went on to an SVR of 6.75 per cent, say, it would rise to £1,036."
While some lenders do opt to write to their customers two or three months before the end of a deal with details of other offers, there's "no regulatory requirement" to do so, says the FSA.
It explains that the "Key Facts" document which borrowers receive when they sign up to a mortgage deal is sufficient since this also includes loan details.
In other words, it is up to borrowers to keep track of their deals - especially, says Mr Gardner, as many of those lenders that do write to their customers leave it very late before spelling out the options at the end of a deal.
"It takes about four to six weeks to remortgage with another lender, but your existing provider will probably only write to you a month or so ahead of time, and maybe even less. If you ask what your options are ahead of that, lenders often say they don't know, so you can't make a decision. It's stalling tactics."
Mr Montlake strikes a slightly more optimistic note: "In a bid to increase their borrower retention rates, lenders have become more efficient in the way they deal with existing clients, Many more are writing earlier."
Brokers, he adds, will usually contact clients around three months before the expiry of a deal to set out the options.
In the past, the general rule for those taking action on their home loan has been to move their business elsewhere. Now, though, this isn't always the case.
If you stay put, you'll save on valuation and legal charges - and also exit fees, which can be as high as £300. "A slightly more expensive rate with your existing lender may be the more cost-efficient option," says Mr Montlake.
However, competition for remortgaging business is intense and there are now many deals where, on transfer, the new lender will willingly meet the valuation and legal charges.
Simon Cook, 26, from Manchester, was able to rely on broker Savills Private Finance to remind him that his two-year fix expires in October. "I knew it was around the time my current deal was due to come to an end, but was pleased to get a reminder from my broker as my lender didn't openly tell me this."
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