Successive rises in mortgage rates since the summer were offset by the fact that increasing numbers of borrowers were locked into cheaper fixed and discounted mortgage rates. But what happens when the fix comes to an end? Clifford German has some bad news.
Mortgage borrowers could be forgiven if, over the next few months, they compare the multiple financial stings they are about to face to sticking their heads in a hornets' nest.
The first sting will come for many when their mortgage rates are adjusted. A substantial proportion of borrowers, including almost two-thirds of Halifax's 2 million mortgage holders, are facing their annual adjustment about now. For the majority, costs will rise in a single jump from 7.25 per cent to 8.7 per cent, a 20 per cent increase in charges. On a typical pounds 60,000 interest-only loan this will mean about pounds 65 more a month.
The second sting will hit borrowers benefiting from Miras, which automatically allows them tax relief on the interest on up to pounds 30,000 of mortgage debt. They will find their bills rise from April when the tax relief is reduced from 15 per cent to 10 per cent. This will add a further pounds 10 a month to mortgages of pounds 30,000 and over.
Simon Tyler, managing director of mortgage brokers Chase de Vere, has coined the expression "payments shock" for this double whammy.
As if that were not bad enough, hundreds of thousands of borrowers who were quick to see a bargain two and three years ago and took out discount mortgages and low fixed-rate mortgage are also in for a shock.
Many of them are now coming to the end of their mortgage honeymoon and will be reverting to standard variable rates of up to 8.7 per cent, backed by lock-in penalties of up to six months' interest if they try to move their mortgages elsewhere. For them, the "payment pain", where rates will rise overnight by up to 4.5 per cent, will also be acute.
Monthly payments on a typical pounds 50,000 interest-only mortgage at 4 per cent could more than double, from pounds 151.66 a month to pounds 329.88, as soon as the rates revert to standard variable rates.
So, are there ways of avoiding "payment shock"? For borrowers on standard variable rates, whose annual review is taking place about now, it is still possible to switch to a fixed-rate mortgage with their own lender or even remortgage with another lender.
There are some good fixed-rate deals still on offer, with rates ranging from 4.75 per cent for two years from FirstMortgage, 5.89 per cent for three years from Bristol & West, and 6.49 per cent for five years from Birmingham Midshires.
Borrowers who think variable rates are near their peak and will come down to 6 per cent or less within the next three years may prefer to go for a discount remortgage. Best buys include a 2.75 per cent discount for two years from Chelsea Building Society, 2.3 per cent off for three years from FirstMortgage and 1.25 per cent off for five years from Nationwide, while mortgage broker John Charcol is offering 1.5 per cent off for three years plus a 1.5 per cent cashback.
But the headline rates are not the only thing to consider. Most fixed- rate and discount-rate offers require payment of administrative and legal fees, and sometimes compulsory insurance, and levy a penalty of up to six months interest or 5 per cent of the amount repaid on borrowers who decide to repay within three to five years.
Some of the best deals are also also the most restrictive. If you want flexibility as well as up-front savings, look for low penalty or no-penalty offers. John Charcol, for example, offers a four-year, fixed-rate mortgage at 6.99 per cent, with no penalty for early repayment.
Chase de Vere is offering borrowers whose repayments are set to double an escape route through another two-year fixed-rate mortgage. Borrowers who want a remortgage loan in excess of pounds 75,000 which is less than 90 per cent of the value of their property can have one which is fixed until January 2000 at 3.95 per cent.
A borrower with a pounds 100,000 mortgage fixed at 4 per cent and currently costing pounds 318 a month in interest, could remortgage at 3.95 per cent and borrow pounds 105,000 - to cover pounds 1,000 of fees and pounds 4,000 repayment penalties - and pay just pounds 330 a month.
The alternative is to pay pounds 692 a month when the existing loan reverts to the standard variable rate. Bear in mind that anyone who takes up such an offer will probably face the same dilemma - increased mortgage costs - plus more redemption penalties when standard variable rates begin to bite again in two years' time.
John Charcol: 0800 718191; Chase de Vere: 0800 747374; FirstMortgage: 0800 0800088. Details of other lenders from local directories.
'The Independent' has produced a free guide to mortgages, sponsored by Barclays Mortgages and written by Nic Cicutti, personal finance editor. For your free copy call 0800 585 691, or write to Mortgage Guide Freepost, PO Box 7, Brentford, Middlesex, TW8 9BR.