Millions of mortgage holders have either been hit with a huge rise in repayments this year, or will shortly see costs soar. Yet some five-year fixed rate deals for new borrowers are at an all-time low. So is it time to consider a new home loan?
Some commentators have stuck their necks out to recommend many borrowers on their lender's standard variable mortgage rate (SVR) switch to a five-year fix.
This all comes after the news Santander will become the latest lender to raise its SVR — which most deals revert to after an introductory offer — from 4.24% to 4.74% on 3 October, hitting hundreds of thousands of borrowers, and adding £312 per year to costs on a £100,000 repayment mortgage.
Bank of Ireland, Clydesdale/Yorkshire Bank, the Co-op, Halifax and ING Direct have all raised their SVR this year. RBS also raised some variable offset mortgage rates. These hikes have already hit well over a million borrowers in the pocket.
On the flip side, costs for new borrowers have nose-dived. Five-year fixes are now at their lowest-ever level, with some at under 3%. Crucially, the best deals are often only available for those with a hefty amount of equity, usually of 40% of their property value.
NatWest offers a five-year fix at 2.95% but with a hefty £2,495 fee. The lowest two-year fix via data provider Moneyfacts, from West Brom Building Society, comes with the same rate and a £999 fee.
The fall in rates has been largely attributed to the Government's new Funding for Lending scheme, which allows banks and building societies to get hold of cheaper cash to lend to consumers.
Ditch your SVR?
Mortgage experts say the decision on whether to ditch your existing SVR for a new deal comes down to the maths, factoring in all fees to switch and for a new loan, though it's also worth considering where you will be in a few years. Fixes can be restrictive if you move home, while they only allow limited overpayments.
Ray Boulger, from broker John Charcol, says: "As a general rule the higher the SVR and the more equity in the property, the greater the benefits of remortgaging.
"Subject to some caveats I would recommend switching from SVR to a five-year fixed rate for most people. Base rate is likely to remain very low for several years but fixed rate pricing is reflecting this and unlikely to fall much further."
These caveats include:
- Older SVRs from Lloyds TSB and Nationwide, at 2.5%, are so low that switching may cost you. Boulger says: "In most cases, these borrowers should do nothing as they have a cheap rate with no early repayment charges."
- Borrowers on an interest-only deal may not meet a new lender's tougher criteria to get another interest-only loan.
- With a fix, you may not be able to take it with you to a new home if you move during the term. You would need to meet a lender's criteria at the time of the move.
- Factor in all fees both to leave your current mortgage and to get a new one when doing the maths.
The major lenders' SVRs are:
|Lloyds TSB||2.5% or 3.99%|
|Nationwide||2.5% or 3.99%|
|(i) Not technically an SVR but what most borrowers revert to. (ii) From 3 October|
How to get a mortgage
The mortgage market is complicated, so the best route for most is to use a 'whole-of-market' mortgage broker (see the Remortgage Guide for help switching).
Not only can he or she recommend a top deal, they can also advise whether you are likely to qualify. Getting a top deal not only requires plenty of equity, but often a spotless credit record.
However, brokers cannot access all the best deals, as some are only available to those who go directly to a lender. So before speaking to a broker, go armed with best buy tables from the likes of Moneyfacts and ask your broker to compare the top deals against what it recommends.
Can you actually get a cheap mortgage?
Whether you qualify for a cheap deal depends on the equity you have in your property: the portion you own outright that you don't need a mortgage on.
Below is a rule-of-thumb guide to type of deals you can get depending on the proportion of the property value you need a mortgage on, often called the loan-to-value (LTV).
- Up to 60% LTV. Here, you may find a product cheaper than most SVRs though brokers warn these could go at any time. Even for those who have redemption penalties, a simple calculation will determine whether it is worth paying the penalties to break your existing contract and enjoy lower monthly payments. See the Ditch my Fix? calculator.
- 60%-75%. There are many cheap deals available even if the ultra-low ones aren't. However, there is less choice. Another down side is lenders will become more picky so you will need a virtual spotless credit file. Meanwhile, lenders may only offer interest-only deals at up to 50% or 60% LTV.
- Above 75%. At this level, the cheapest deals are no more and criteria is even tighter, though brokers say some may still save by doing a comparison of costs compared to what they currently pay.
Should you fix?
As it is impossible to predict the market, focus on your own finances. The big benefit of a fix is it gives surety – so you can budget on set repayments.
The more stretched your finances, the more valuable this certainty is.
Another consideration is what you think will happen to rates. Many commentators think it is highly unlikely the Bank of England base rate, currently at an historic 0.5% low, will rise at all any time soon.
While none have the benefit of a crystal ball, if you agree, then moving to a new base rate tracker is an option. Unlike most SVRs, with one, if the base rate doesn't rise, nor does your rate.
There is even the outside chance costs could fall with a tracker, though with the possibility they could rise if the economic climate turns, meaning a tracker is a gamble.
If you plan to fix, which fix?
Boulger says: "There is little difference between the rates on two, three and five-year fixed rates, and so for most people a five-year fix looks the best value.
"There is little value in a two-year fix unless one doesn't want to be locked in for five years, perhaps because of a planned move. Although fixed rates are generally portable, one has to be able to meet the lender's criteria at the time of the planned move to be allowed to move the mortgage."
Andrew Montlake, from broker Coreco, says: "Care should be taken to weigh up the pros and cons.
"Longer term fixes are also not suitable for everyone. Although many deals will allow you to overpay up to 10% annually without penalty and are portable should you wish to move home, this still imposes certain limits on flexibility."