The election could change your borrowing plans
An uncertain result makes selecting a mortgage even harder. Laura Howard explores the options
Sunday 18 April 2010
Choosing whether to opt for a fixed or variable rate mortgage is not easy at the best of times. But in the run-up to a close election, things become even more confusing, as the future of interest rates and the wider economy hangs in the balance.
"The outcome of the election is particularly unclear, as are the implications – such as how the winning party will lead us to economic recovery," says David Hollingworth of mortgage broker, London & Country. "For borrowers, then, it's hard to know what to do for the best."
The situation is made murkier still by the feasible prospect of a hung parliament – where no political party has an outright majority of seats. "A hung parliament would be a recipe for parliamentary indecision and inaction, and one thing the money markets hate is uncertainty," says Ray Boulger of broker John Charcol. Nervous money markets usually result in increased costs of funds which, in turn, would push up the price of mortgages.
There are two equally valid approaches borrowers can take, according to Hollingworth. "You could decide to take a 'holding approach' by opting for a cheaper tracker now and waiting to see how rates pan out after the election. With some lifetime trackers you can leave at any time without paying an early repayment charge. Alternatively, you could decide that now is the time to seek out security with a fixed rate mortgage in advance of the election result."
But there are ways to hedge your bets too. For example, as a mortgage application is unlikely to complete by 6 May anyway, you may be able to change your mind half way through the process once you are armed with more information. But it's worth knowing the lender's policy on this in advance, says Melanie Bien, a director at broker Savills Private Finance.
"If you decide to apply now but potentially pull out later, avoid lenders that charge the arrangement fee up front as you could end up paying up to £1,000 which you won't get back. Some lenders, such as Lloyds and Nationwide only charge a non-refundable booking fee of £99 to reserve a rate, which is less of a hit, while others don't charge any non-refundable fee upfront."
Some mortgage deals are actually designed to allow borrowers to change their minds. Nationwide, for example, offers a "switch and fix" option on all its tracker deals, allowing customers to jump to a fixed rate at any time without incurring early repayment fees.
"The switch and fix facility gives customers peace of mind at a time when it is particularly hard to predict the future," says Katie Moore, a spokeswoman for the building society. "It gives borrowers the confidence to take advantage of a low interest rate environment with a tracker and, if interest rates start to rise or their circumstances change, they can fix in."
However, while early repayment charges are not payable on the tracker, there will be an arrangement fee for switching to the fixed rate deal, which will need to be factored into what you are saving, says Boulger.
If you prefer to lock in the rate you pay but are concerned about doing it now, HSBC and First Direct allow you to book a rate up to six months in advance. "For example, you could reserve our best-buy 2.99 per cent two-year fix today and draw down the funds anytime within the next six months, whether the deal is still available then or not," says spokesperson James Thorpe.
"This means if you are currently paying less than 2.99 per cent – such as Nationwide's base mortgage rate of 2.5 per cent – you can continue to do so for up to a further six months if you wish. But if this rate increases you can switch over to the fix at any time." If you decide to pull out entirely however, arrangement fees – in this case £999 – are not refundable.
If you do opt for a fixed rate however, a five-year term is probably more sensible than a two-year term. "We believe that interest rates will be rising in a couple of years' time so you will be remortgaging again just when rates are higher," says Bien.
But even the uncertainty of a hung parliament is not certain and, while politics may be an added consideration for mortgage-hunters, borrowers should still look at their choices at a grass roots level, says Bien: "While you can hedge your bets, there is a strong argument for choosing the type of mortgage that best suits you, whatever happens with the election. For those on a tight budget who like to sleep at night, a fixed rate is usually a good idea. However, if you can afford your mortgage in the event of rates rising, then a base rate tracker looks a good bet; these are initially cheaper than fixes, plus, interest rates likely to remain low for a couple of years."
While seeking advice from a broker might seem particularly sensible during pre-election uncertainty, borrowers should be aware that most of the market-leading deals in both fixed and tracker camps are offered by lenders that don't deal with brokers.
The Post Office for example, which is a direct-only lender, is offering a five-year fixed rate at 4.59 per cent in return for a 40 per cent deposit. First Direct lowered its five-year fixed rate to 4.54 per cent on Thursday. Woolwich and Nationwide – both accessible through brokers – have deals priced at 4.99 per cent in return for a 30 per cent deposit.
The best lifetime tracker is from First Direct – another lender that only accepts business directly from the consumer. It is priced at bank base rate plus 1.89 per cent, making a current rate of 2.39 per cent. The deal, which comes with no early repayment charges, is available on a repayment basis only, and up to a maximum loan to value ratio of 65 per cent. Woolwich has a lifetime tracker priced at 1.99 per cent above base rate, at up to 70 per cent loan to value ratio.
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