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Your Money > Mortgages Articles > What to do...
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By Sarah Modlock
Coming to the end of your mortgage deal and shopping around for a new one is always a bit of chore. For many, the current climate of restriction means it can also be a scary process where getting any new deal is a struggle, let alone a cheap one. The golden rule here is to plan ahead. It may not be the ideal way to spend a Saturday morning but start shopping around three months before the end of your current deal and you can avoid nasty surprises and panic. You can also ensure that you don't end up slipping onto your lender's standard variable rate (SVR) which will happen as a default when your existing deal ends, if you do not remortgage. SVRs may sound harmless enough but they are generally the most expensive rate to be on - usually at least two or three percent higher than other rates - the average is currently 7.02%. Incredibly - one in five homeowners - or 2.4million households - currently put up with this and as a result pay far more than they need to for their mortgage. Assuming your previous deal did not lock you into a stint on the SVR (known as extended redemption penalties) then make sure your new deal starts as the old one ends. You can start by asking your existing mortgage lender what they have to offer you but you may find it helps to do some research first so that you can list more competitive deals you have been offered and ask them to match them. That is, of course, if you want to stay with your current lender. You can also go to a mortgage broker to find the best deal - just make sure that they can view the 'whole of market' - look at every mortgage on offer and not just a panel - and ensure they do not charge a fee (they will be paid via commission). Make sure they take into account any fees to move your mortgage. Track or fix A tracker mortgage will move with the Bank of England's base rate and so what you pay will rise and fall - or remain the same - in line with it. Some borrowers may be prepared to gamble that rates will drop in the coming months but these loans tend not to suit borrowers who need to know exactly what they will be paying every month for their mortgage. The days of super-low fixed rates over long periods are sadly over. "As predicted by Moneyfacts, the average rate for two-year fixed rate mortgages available on the market today breaks the 7% barrier and stands at 7.02%," says Moneyfacts' Darren Cook. "Anyone looking to fix their mortgage for five years is also paying the price as the average rate on offer now increased to 6.82%. This increase is a result of the two-year swap rate reaching 6.52% three weeks ago. Any increased cost to lenders in arranging the funds on the money market is passed on to customers. Lenders are also taking an increased margin on top as they price their products for risk." "As the rates on offer increase, so does the relative risk. More and more borrowers are likely to find the increased repayment too much to bear. It is now three weeks since the peak in swap rates and we would expect to see the cost of fixed rate deals starting to fall, but this isn't the case. In fact the opposite is true, with rates continuing to rise. Borrowers hoping to fix their mortgage repayments for three years are being hardest hit, with the average rate now standing at a staggering 7.25%. Two year fixed rate deals have also not being immune, with the average increasing to 7.07%.," Cook explains.
"Some lenders, including Abbey and Cheltenham & Gloucester have recently announced cuts in their fixed rate deals. However, Halifax has increased rates by up to 0.20%, while NatWest and Royal Bank of Scotland have increased rates by up to 0.40%."It is an extremely worrying time for anyone coming to the end of a fixed rate deal. Borrowers coming to the end of a three year fixed rate deal, looking to fix for another three years could see a £158.23 increase in their monthly repayments (on a £150K mortgage), equating to an additional £5,896.28 in true cost over the three years.
"Our two, three and five year fixed rate best buys are now entirely dominated by deals over 6%" says Cook. "This time last year, deals over 6% didn't even make the best buys. There are still a handful of sub 6% deals, but these come with such high fees that any benefit from having the slightly lower rate is likely to be wiped out by the fee. "There doesn't appear to be any let up in the misery for borrowers. Lenders need to start playing the game fairly and pass on the cut in swap rates as quickly as they pass on the increase." Soaring mortgage fees Another gloomy development is the incredibly expensive mortgage arrangement fees being imposed by many - but not all - lenders at the moment. It is hard to see why arranging a mortgage now should cost up to five times more than it cost them six months ago. If anything, the process is simpler and easier than it was a few years ago when rates were tiny in comparison. "Many of the banks now have automated valuation models, which cut out the need for a surveyor," explains Michelle Slade, of Moneyfacts.co.uk. "Credit scoring is also easier. In 1992 a bank manager would have used his or her discretion, but now a computer does the work. Technology has moved on since 1992, so the process will be much more streamlined." Bristol & West and Alliance & Leicester have come in for criticism for their percentage fees - slammed because it should cost about the same to set up a £100,000 mortgage as a £250,000 one. The average mortgage fee has increased tenfold in only 15 years to nearly £1,000 and even higher in some cases. But the bulk of the increase occurred between 2006 and last year, when the average fee for taking out a deal almost doubled from £514 to £937, while in the past year the average rate has continued to rise alongside increases in interest rates. This has prompted the Chancellor to warn lenders that he may take action against very high fees if they do not curb the increases. Many borrowers will choose to roll the fee into the the mortgage loan rather than finding the cash to pay for it up front. This may solve the immediate problem but it does mean that they will end up paying interest on the money. Fees also make it harder to compare the true cost of mortgages. In addition to arrangement fees you may also come across non-refundable application fees of around £100. Some lenders such as Cheltenham & Gloucester keep this money whether your application is successful or not. Others such as Abbey will refund it or deduct it from the final arrangment fee if you take the deal. Mortgage 'account fees' - supposedly to cover the cost of admin for the entire loan - are also popping up. These are currently in the £220-£300 range. The message is to shop around sooner rather than later and consider using a fee-free broker to find suitable fee-free deals. Useful links: |
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