It’s a worrying time for the 1.4 million British homeowners who will come to the end of cheap fixed-rate mortgage deals over the next year.
The problem originates in the crisis caused by America’s subprime mortgage market.
A rise in defaults led to an increase in the rates at which banks lend money to each other, and so to the rate at which they can lend money to us.
But amid concerns that repossessions will rise dramatically as lenders tighten their criteria and people coming off fixed rates find themselves on a rate around two per cent higher, the predictions aren’t really so gloomy.
The Outlook
On the positive side, there is a widespread expectation of at least two further Bank of England rate cuts to follow the 0.25 per cent fall in December, which could mean a base rate of five per cent or, some optimistic types predict, a rate as low as 4.5 per cent by the end of the year.
However, although December’s cut was passed on by the majority of lenders, there have been reports that some are actually increasing their new tracker rates by 0.1 per cent or 0.2 per cent, and so are, in effect, splitting the difference with borrowers.
But perhaps the best indicator of a happy new year for borrowers is a lower base rate combined with a drop in the libor, the rate at which banks lend to each other.
The inter-bank lending rate, has now dropped from its recent high of 6.65 per cent to 5.89 per cent, bringing it closer once more to the base rate.
Katie Tucker of John Charcol says that this is a good sign for people looking to secure an affordable deal this year.
"If banks can borrow money cheaper, they can lend money cheaper. If the Bank of England rate also falls this month, the next few weeks should bring some very good value mortgage deals back onto the market."
Beginner's Guide: Remortgaging
Be Prepared
Whatever you do, don’t do nothing.
When your mortgage deal comes to an end your lender will automatically transfer you onto their standard variable rate (SVR), which is usually a couple of percentage points above the Bank of England’s Base Rate.
An increase of around 2.5 per cent in the interest rate you pay on a mortgage of £150,000 could easily leave you over £200 worse off a month.
The key is to plan ahead, which is something, says Katie Tucker, which many people fail to do, particularly at this time of year.
"Borrowers reaching the end of their deals in January or February often fall into the trap of leaving the arrangement of their remortgages until after the holiday period," says Tucker, "leaving them insufficient time for the transfer to go through."
To be sure of finding a good deal in time start shopping around for a new mortgage around three months in advance.
It can take a while to complete the paperwork, and then, once you’ve got to the stage of a formal offer, the product will be held for you for a period of at least three months.
However, in the current climate, if you’re looking for a fixed-rate mortgage and you have time to play with, it might be worth hanging back to see how any further base rate drops affect the products on offer.
Beginner's Guide: Remortgaging
Which Product?
Although lenders may be more cautious, there are still literally thousands of deals available. And while there are some general principles to bear in mind this year, the best product is, as always, the one that suits the needs of the individual.
1. Trackers
David Hollingworth from London and Country independent mortgage brokers says that despite some lenders putting up the price of trackers, mortgages that follow the Bank of England base rate, and so can increase or decrease, will be the big news of 2008.
"Fixed rates made up around 70 per centof the market in 2007, but trackers will be in the spotlight this year because the interest rate is expected to fall further, though there are, of course, no guarantees that this will happen."
This, indeed, is already happening – new figures from the Council of Mortgage Lenders reveal that in November borrowers, anticipating rate cuts, turned away from fixed-rate deals.
CML director general, Michael Coogan, commented: "There are mixed signals on inflationary pressures here which will make the MPC’s decision finely balanced, but consumer confidence would be further underpinned by another rate cut this week.
"Most borrowers are on fixed rates and so will not see any immediate benefit from another change in the base rate. Some are on tracker rates which will automatically follow changes in the base rate or LIBOR (both up and down). "
London & Country note that the Co-op is offering a good deal at the moment at 0.01 per cent below base for two years, making it currently 5.49 per cent. Or, if you want to avoid paying fees again in a few years the Cheltenham and Gloucester have some competitive lifetime trackers.
Beginner's Guide: Remortgaging
2. Fixed rates
Fixed rates will continue to be popular as they offer the borrower the security of set monthly payments no matter what happens in the financial markets. However, this also means you won’t benefit from any drop in interest rates.
David Hollingworth says he has already spotted signs of lenders clipping a bit off their fixed rates, and believes that even in this uncertain market there is potential for some competitive fixed-rate pricing.
"In previous years this was a hugely competitive market, but it’s not as cutthroat now in terms of pricing. But you are still looking at a two-year fixed rate at around 5.5 per cent. First Direct even have one at 4.99 per cent."
The rate, moreover, is not everything. You have to look at the fees too. Fees have been creeping up over the last few years and generally, the bigger the fee, the lower the rate will be, and vice versa.
Although you may baulk at fees that can be nearly £2,000, you need to do your maths. If you’ve got a big mortgage it may be worthwhile paying high fees to get a lower rate.
Beginner's Guide: Remortgaging
3. Discounted rates
Discounted rates, which are linked to the lender’s SVR, rather than the base rate, may look competitive when compared to trackers, but David Hollingworth advises caution:
"The base rates may come down, but with a discounted rate the lenders are under no obligation to follow suit.
"Although most lenders reduced by the full 0.25 per cent in December with further cuts we have the potential that they may not reduce again."
Beginner's Guide: Remortgaging
4. Offset mortgages If this really is set to be the year when we start to take our debt seriously, offset mortgages may gain popularity.
By offsetting savings against debts borrowers can feel smug about owing less while having access to cash in a hurry if they need it.
But you need to have a reasonably large pot of savings to make it work. David Hollingworth advises that it is only really worth thinking about an offset mortgage if your savings amount to 5-10 per cent of your mortgage.
The exception to this is the fixed rate products that offer offset functionality thrown in and can offer a good deal whether or not you have any savings.
Beginner's Guide: Remortgaging
Top Tips
1. Take action well before your mortgage reverts to your lender's SVR.
2. Lenders’ criteria are becoming tighter, so you may need to shop around and make more applications than in the past.
3. Products change quickly, so move fast if you find a good offer.
4. Be aware of fees, and work out how they affect the deal as a whole.
5. Consider using a mortgage broker to help you to work through the maze of products.
6. Chose an advisor who has access to the whole market and does not charge you commission.
Nikki Sheehan
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