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Your Money > Mortgages Articles > Coming off a...
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By Richard Evans
Interest rates just keep rising. The Bank of England has imposed five increases over the past year and many commentators expect at least one more jump, which would take the base rate to 6 per cent. The severity of this "rate shock" depends on when the loan was taken out. "If you are just coming to the end of a five-year fix, you will not see much of a shock, as rates now are roughly back where they were when you took out the loan," says Ray Boulger of John Charcol, the mortgage broker. "And there is a good chance that your income has gone up in that time, making your loan more affordable." But it's a different story if you are coming to the end of a two-year fix. Such borrowers were lucky or clever enough to take out their loans at a time when interest rates were much lower (and many commentators say that, with hindsight, those who opted for longer fixes two years ago made a very good move). Two years ago a typical two-year fixed-rate mortgage carried an interest rate of 4.25 per cent, says David Holmes of Yorkshire building society; the same deal now will cost about 5.75 per cent, he adds. "This is a big leap. But we and other lenders will bend over backwards to keep people in their houses," he says. So if your fixed-rate deal is coming to an end and you face a hefty rise in your repayments, what can you do, and how can lenders help? "Start to look for a new mortgage a good couple of months before your current loan expires," suggests Martin Ellis of the Halifax. "Don't wait until your fix ends and the rate reverts to the lender's standard variable rate." Most SVRs are currently 7.75 per cent. "Shop around for the best deal for your circumstances. There are still some good fixes around and it should be possible to switch straight from one to another without a period on an expensive SVR," he adds.
He says there are strong arguments for tracker loans, which go up and down in line with the base rate. "The best rates on trackers are around 5.45 per cent - the best fixes charge more than this. And even if rates do go above 6 per cent - which I think is unlikely - the question is how long they will remain there. If it is only for a short period, the benefit of a fix is short-lived and a tracker may cost less overall." Although two-year trackers offer the lowest rates, adds Mr Boulger, longer terms avoid the cost and inconvenience of switching to a new loan in two years' time. Those with smaller loans should think about longer-term trackers, as fees make up a greater percentage of their total cost. "And the gap between the best lifetime trackers and the best two-year trackers is not that big," he says. "Woolwich offers a lifetime tracker that charges 0.18 of a percentage point plus the bank rate if you are borrowing up to 60 per cent of the property value. There is no arrangement fee or early repayment charge and on remortgages you get a free valuation and free legal work. The best short-term trackers charge about half a percentage point less." Woolwich's rate rises to bank rate plus 0.29 for loans up to 80 per cent of property value and bank rate plus 0.59 if you need to borrow up to 95 per cent.
If you don't think you can afford any new loan, there are a number of other options, although they will often cost you more in the end. You can, for instance, ask your lender to increase the term of your loan. This will reduce your monthly repayments, as you are paying off less of the capital each month. Taking this idea to its extreme is the interest-only mortgage. With this type of loan you make no repayment of capital and are no nearer to paying it off after each monthly repayment. It does mean, however, that your repayment is as low as it can possibly go without your outstanding loan actually increasing. One benefit of these approaches is that your credit rating does not receive the severe black mark that would result from an actual default. Mr Boulger has another suggestion. "Even if you go interest-only, most loans allow overpayments, so you could pay off some of the capital when you can afford it. Alternatively, if you remortgage to a flexible loan, you could borrow say £5,000 more, then immediately pay it back into the mortgage as an overpayment. A flexible mortgage allows you to borrow this back whenever you like, so it's there to use if things get tough. "The beauty of this arrangement is that if you can meet the repayments after all, it will cost you nothing. But do check the exact terms of your loan to make sure you can do this." But what can you do if none of these courses of action make your mortgage affordable? Lenders are unanimous that the vital thing is to contact them as soon as possible. "Rates are still at historically low levels and we think that even those who fixed at the bottom of the market should be able to cope. But plan ahead, and contact your lender early if there are problems," says Neil Johnson of the Building Societies Association. "Lenders are good at managing arrears these days. Possible steps include rescheduling, reducing other borrowing and moving to interest-only." Useful links |
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