The only way is up, so is this the right time to tie your mortgage debt down?

Consider switching to a fixed-rate deal, writes Melanie Bien, because last week's rise in interest rates could be just the start
Click to follow
The Independent Online

Homeowners on variable-rate mortgages may already be counting the cost of last Thursday's rise in the Bank of England base rate, with a number of lenders wasting no time in passing the 0.25 per cent increase on to customers.

But before you start panicking about being able to meet bigger monthly payments, it is worth putting the increase in perspective. By itself it is not that significant: someone with a £100,000 repayment mortgage will fork out an extra £14 a month. If this were interest only, repayments would rise by around £21.

But while this is unlikely to break the bank, it is a sign that the era of low interest rates (this is the first rise in more than three and a half years) has ended. The future trend is likely to be upwards, with some pundits predicting that the base rate will be as high as 5.25 per cent by the end of next year. This is still low compared with the 15 per cent seen in 1989, but such a rise, from 3.75 per cent today, would have a big impact on a homeowner's variable monthly mortgage repayments.

Take someone with a £100,000 repayment home loan, taken out over 25 years, who was paying £500.62 a month last week. He or she will need to find an extra £84 a month if rates rise to 5 per cent. And if you are already overstretched with other debts and outgoings, this may be more than your finances can take.

With the prospect of higher rates on the horizon, it's worth assessing whether you'd benefit from remortgaging. The only borrowers who don't need to take any action are those who are already on a fixed rate, as last Thursday's increase won't affect them at all. If you are in this position, however, make a mental note of when your fixed period comes to an end so you can find a new deal a couple of months beforehand.

If you are on a variable deal, it may be a good idea to opt for a fixed rate. This sets your monthly repayments in stone for a number of years - usually two, three or five - no matter what happens to interest rates. The problem is, though, that the market had already factored in a rise, with most lenders increasing the rate on their fixed deals several times in the past three months. If you'd fixed in July, for example, you'd have got a rate 1.5 per cent lower than you would now.

Even though the deals have become less generous, however, "it is still wise to consider fixing your mortgage payment," advises Stuart Glendinning at moneysupermarket. com, a website which compares a range of financial products. "This is especially the case for consumers whose incomes are so stretched that potential future rate rises could be an increasing burden."

David Hollingworth, at broker London & Country, agrees: "It is dangerous to say that fixed rates are not good value. They are still very low, although not as low as we have seen them." He likes Britannia building society's two-year fix at 3.99 per cent or Leeds & Holbeck's five-year deal at 4.99 per cent. The latter has no redemption penalties at any time.

Although there are longer fixes of up to 25 or 30 years, Karen Ritchie, partner at independent financial adviser Finance4Women, is not convinced they are the answer. "I don't recommend people fixing for more than two or three years," she says. "If we do join the single currency, interest rates will have to come down in line with the rest of Europe. So if you are stuck on a high fixed rate, you won't be impressed."

If you don't need the security of fixed monthly payments and aren't a first-time buyer or on a tight budget, think about opting for a discount rate. The Woolwich, for example, is offering a 2.35 per cent discount over two years, giving a current pay rate of 3.19 per cent.

"The base rate rise means those on discount/tracker deals will be paying more next month," says Ray Boulger at mortgage broker Charcol. "But it would have to rise by over 1 per cent to at least 5 per cent before pay rates on the best discount and tracker mortgages exceed those on fixed rates of four or five years or longer."

If you are considering remortgaging, bear in mind the costs involved. Allow around £250 for valuation fees, £300 for an arrangement fee and £350 for legal work. If you incur redemption penalties for remortgaging, you must also work out whether they are less than any saving you would make for switching your home loan. Try the remortgage calculator on Charcol's website to work this out.

You don't have to remortgage to reduce your repayments in the long run; many lenders allow you to overpay by up to 10 per cent of the mortgage amount each year. This cuts back your debt so that, when rates do rise, you won't have to pay as much.

'We wanted the security of fixed payments'

The threat of an increase in interest rates, coupled with some fairly attractive fixed- rate deals and a change in family circumstances, have persuaded Jo and Simon Welch to opt for a fixed-rate mortgage.

The couple are moving from their Nottingham home later this month to a more spacious property in Wycomb, Leicestershire. As a result, they are taking on a bigger mortgage and want to minimise the impact of possible interest rate rises as much as possible.

Mrs Welch, a project manager at Boots, says she and her husband decided to opt for a five-year fixed-rate deal from the Nationwide at 4.89 per cent to cope with the various changes happening in their lives.

The Welches have a two-year-old son, Jacob, and another baby on the way, and wanted the certainty of set monthly mortgage repayments. "We wanted the security of fixed payments so we don't see any unexpected increases," says Mrs Welch. "This should make it easier for us to manage our money. There is always a fear interest rates are going to rise and that can happen at any time."

Looking for credit card or current account deals? Search here