You're not doomed to soaring costs if a cheap mortgage dies

How to keep the repayments down at the end of a quick fix
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The Independent Online

Tens of thousands of homeowners who have enjoyed cheap fixed-rate loans are bracing themselves for the end of the party. Anyone whose two- or three-year deal is about to expire is likely to face higher monthly payments on the next loan.

Since February 2004, the Bank of England has hiked the base rate a total of five times from 4 per cent to its current 5.25 per cent (not-withstanding a dip from 4.75 to 4.5 per cent between August 2005 and 2006).

The impact on short-term deals has been marked. At the start of 2005, Portman building society offered a two-year fix at 4.49 per cent with a £399 arrangement fee. Last week, the nearest equivalent deal with the same lender was priced at 5.12 per cent with a £999 arrangement fee.

For many homeowners, the best deal their existing lender can offer may add more than £100 a month to their mortgage, while a move elsewhere may trigger expensive arrangement fees (at an average of £578, says financial analyst Money-facts) and mortgage-exit charges (an average of £160).

However, there are ways to keep your short-term monthly outgoings roughly the same, including spreading your repayments out over a longer period.

"Most lenders will now allow you to extend your mortgage term up to retirement age, and even beyond if you can prove a pension income," says Ray Boulger of broker John Charcol. "Clearly, the longer you borrow for, the more expensive the loan [in terms of extra interest to be paid]. But if your new mortgage payments look unrealistic and there is a risk of falling into arrears, this has got to be a better option in the immediate term."

If you're on a repayment mortgage, you could switch for a limited period to a deal where you just pay off the interest. A £200,000 interest-only mortgage, taken over 25 years and priced at 5.5 per cent, costs £311 a month less than it would on a repayment basis.

Louise Cuming, head of mortgages at the price-comparison website Money-, says: "It does not make financial sense in the long term to switch to interest-only or even extend the term of your loan. But when it's about affording the 'here and now', they become two very sensible options."

She stresses the importance of going back to a repayment plan when you can afford it, and either overpaying or shortening the term of the mortgage to catch up with repayments.

Another alternative for those coming off a cheap fix is to consider a stepped discount mortgage. This offers a percentage off a len- der's standard variable rate in the first year, a smaller discount in the second and a still smaller one in the third - and could provide some breathing space.

But borrowers should be warned that the deeper the saving in the first year, the bigger the steps up.

In any calculation of what to do, it's imperative to work out exactly what your new monthly mortgage payments will cost. Look beyond "best buy" tables that focus on the interest rate, and make sure you take any charges into account.

It's not just a case of avoiding the "extras", as deals with high fees often provide the cheapest rates. If you have a large loan, forking out for the arrangement fee can be worthwhile.

For example, broker John Charcol last week launched a tracker mortgage priced at just 4.49 per cent (0.76 per cent below base rate). So the £1,699 arrangement fee can make sense on the product's minimum loan size of £500,000.

Lender is shown the door

The two-year 4.49 per cent fix taken out by Richard French with Portman building society comes to an end on Wednesday. When Mr French enquired about a new deal, the best the lender could offer him at the time would have added £150 to the monthly repayments on his £176,000 mortgage.

"This was worrying as my wife, Qing, and I have just had a baby and I am now the sole earner," says Mr French, a 32-year-old computer programmer who lives in Surrey.

He went to broker London & Country, which sourced a 5.14 per cent two-year fixed- rate deal with the Halifax. "The mortgage had an arrangement fee of nearly £1,000, but even after adding this to the loan, my repayments are only £50 more than they had been."

Mr French adds: "I would have to be really desperate to extend the term of my mortgage or switch to an interest-only deal.

"Although I have concerns about what will happen with rates when this new deal comes to an end, I am still well within affordability."

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