This content originally appeared in the MSE weekly email on 18 February 2015.
Many people can slash £1,000's a year off their mortgage costs, so everyone should check if they can save now.
For mortgage holders the silver lining to the teetering world economy is the threat of imminent interest rate rises has gone, and the cost of mortgages has plummeted to an historic low.
According to Moneyfacts, the average fixed rate is now 3.42% – and the cheapest deals limbo far under that, some nearing 1%. Big savings are possible as we've been told by our users...
"I followed your remortgage tips and formula on the website and now pay £431 LESS PER MONTH by changing my HSBC mortgage deal" – £5,000 a year saved.
"Renegotiated to a five-year fix. The payment's reduced by £600/month which is still being paid into the mortgage so we'll pay off the whole lot in 15 years not 20."
1. How to check your current deal.
A mortgage is the biggest expenditure most people have, so I'm always slightly surprised that when asked not everyone knows their rate and details. So check now that you know...
- a. The current rate: And, monthly repayment and amount outstanding.
- b. Type: Is it a fix, discount, tracker or on a standard variable rate (SVR)?
- c. Deal deadline: If it's a short-term deal (eg, a two year fix), when does it end?
- d. Term: How long is the term, eg, 25 years, and when will it be fully repaid?
- e. Penalties: Are there any early repayment penalties?
- f. Your loan-to-value (LTV): What proportion of your home's current value is borrowed. Eg, £80,000 outstanding on a £100,000 property is an 80% LTV. The lower the LTV the better deal you can get. See LTV help for full info.
2. Benchmark your cheapest deal at speed.
Now you know what your rate is, it's important to see what's out there for you, to help we've our...
We aim to include all possible mortgages – so that's all the usual mortgages that brokers can source, plus those only available directly too. The only ones we may miss are the rare exclusives some brokers have.
The ready-reckoner table below shows you the kind of deals that are out there, but of course to see your best, use the comparison. I've added in the average standard variable rate so you can see the savings possible.
What's out there right now - some example dealsSourced with help from L&C Mortgages
|Deal||Rate||Fee||Annual cost during deal term (incl fee) on £150k (i)|
|FIX 2yr at 65% LTV||1.29%||£975||£7,510|
|FIX 2yr at 85% LTV||2.5%||£250||£8,200|
|FIX 5yr at 75% LTV||2.69%||£995||£8,440|
|FIX 5yr at 85% LTV||3.29%||£975||£9,000|
|TRACKER 2yr at 75% LTV||1.44%||£999||£7,650|
|TRACKER 2yr at 85% LTV||1.75%||£995||£7,910|
|Typical SVR rate for comparison||4.85%||N/A||£10,370|
|(i) Fee spread across the deal period plus the repayments assuming 25 year term.|
3. Fees have a huge impact too – use the MSE total cost comparison.
It's not just about rate, the smaller your mortgage, the bigger the impact of fees. Eg, for those on £100,000 mortgages, the 1.29% deal with its £975 fee is beatable by higher-rate, lower-fee deals.
To help, within our Mortgage Comparison, we have the 'MSE Total Cost' assessment, which factors in both rate and fee over the fix or discount period, so you can see which is really cheapest.
4. How much can you save?
So now you've a rough idea of what you're paying and what you could be paying (in a best case scenario), you'll want to see how much the potential saving is. Our calculators allow you to work it out, even if, for example, you're locked into a fix...
Ultimate Mortgage Calculator
Nine tools to home in on the right answer for you including...
Basic Mortgage Calc | Compare Two Mortgages | Mortgage Overpay Calc
How Much Can I Borrow? | Compare Fixed Mortgages | Ditch Your Fix?
5. Finding a top deal's just the start – then you've got to get accepted.
The days when lenders would fling out deals to all and sundry are long gone, getting accepted is now the challenge. There are two key elements to this...
- Is your credit score good enough? It now plays a much bigger role. Key tips include: a) Never withdraw cash on credit cards; b) Avoid payday loans; c) Avoid other applications, eg, credit card, contract mobile, just before applying; and d) Check your credit file for errors. Full help in 35 Credit Boosting Tips.
- Are the repayments affordable? New rules launched last year mean you need to prove you can afford it. See Boost Your Mortgage Chances.
6. Mortgage brokers can help boost acceptance.
You can, and often should, use a mortgage broker to help you find the right deal.
They have info that's not available to consumers – such as lenders' credit and affordability criteria – so a good broker can match you to the right deal to get accepted. It also offers an extra layer of protection if things go wrong, and they carry more clout with lenders to ease acceptance. Read our Top Mortgage Brokers guide for full info.
However, it is worth noting that some lenders, such as Yorkshire Building Society, Tesco Bank and HSBC, mainly only sell their mortgages direct to the public, cutting brokers out.
As brokers only need advise you of the best deal from all available to them, many don't include these, hence why doing this in conjunction with our best-buy tool above, which does, is important.
7. Should I get a fix or tracker/discount?
With a fixed mortgage, the amount you repay is fixed so it's like buying an insurance policy against possible rate rises. Variable deals move with UK interest rates (sometimes just at the provider's whim). Currently you only pay a touch more to fix.
It's very difficult to predict future interest rate moves, even top economists are singing a different tune now from a year ago saying it'll be early 2016 (or even later) before UK rates start to rise, and there's even the possibility they may fall before then.
While you can't predict the market, you can examine your own situation. The more important the security of knowing exactly what you'll pay is, the more you should hedge towards fixing (and fixing for longer). The more you care about cracking the perfect deal, the more you hedge to short-term trackers. Full help in Fixed vs Variable.
8. Got savings? They could get you a better mortgage.
The lower your loan-to-value the better mortgage deal you may be able to get. At every five per cent LTV threshold from 95% down to 60%, the deals tend to get better, so a little bit of savings could have a big impact on your mortgage rate. An example will help.
Imagine you've a £150,000 home, and want a remortgage for £136,000. That's an LTV of 90.7%, so the top 5-year fix available is 4.89%.
Yet if you use £1,000 of savings to reduce the borrowing needed you'd cross a threshold and be at 90%, where the top 5-year fix is 3.99%. This would save £830 a year in mortgage payments alone. See should I overpay my mortgage for more.
9. Rates are cheap now – could they get cheaper?
Last week the Bank of England Governor said: "Were these downside risks to materialise, the committee could adjust the pace and degree of bank rate increases, expand the asset purchase facility, or cut bank rate towards zero."
That's banker gobbledegook for, if we get extreme deflation (ie, prices across the economy seriously falling), the UK base rate could be cut. Yet the rate mortgage fixed rates are set at anyway already incorporates that to an extent – so quite how much it's possible to drop is debatable.
And remember, if switching now would save you, waiting means you miss out in the meantime, so it's a balance.
10. New FREE remortgage, first-timers guide and buy-to-let booklets 2015.
Mortgages are a big transaction, and the best thing to do is make sure you really know what you're doing. To help we've three totally free 40+ page printed guides, and they've all been updated for 2015.