'Our survey reveals that apathy would rule until rates rose by 1% and we are now there,' says Elliot Nathan. 'Although people should not be overly concerned as base rate is still, in historic terms, low, the recent rises do provide them with a reason to look at lowering the cost of their borrowing. Borrowers with a £100,000 variable rate mortgage will have seen their monthly payments rise by approximately £60 a month in the last 8 months, but many can easily do something to cut this cost.'
Saving grace
Now is the time to counter the increase in monthly payments by shopping around for a cheaper deal. And here's why. An estimated one-third of borrowers are currently paying a lender's standard variable rate (SVR) and losing out to tune of at least £2.5 billion a year. On an £80,000 mortgage, a 1% saving from a typical SVR is worth £50 a month or £600 a year. On a £100,000 loan, the saving is £62 a month. That's £744 a year. If you are re-mortgaging, do the sums to make sure the redemption penalty from your existing loan does not outweigh the savings from your new one.
The right track?
For borrowers prepared to take a view that base rate won't increase beyond 6%, a 2 year discount tracker mortgage from BM Solutions (part of the HBOS Group) 'offers exceptional value' according to independent broker Charcol. This mortgage offers base rate minus 0.51% for 2 years from completion, giving a current initial rate of 3.99%. It is available up to 90% LTV but has a high arrangement fee of £699. 'Despite the high fee the rate still makes this the market leading discount and tracker mortgage for all except small mortgages, say up to £50,000.' says Charcol's home loan expert Ray Boulger.
For borrowers interested in a five-year protected rate Boulger strongly recommends a capped tracker rather then a fixed rate. 'The best 5 year capped rate for borrowers not needing to borrow more than 80% LTV comes from Derbyshire Building Society,' he says. This deal offers base rate plus 0.75%, giving a current rate of 5.25%, with a cap of 5.99%. It also has a free valuation and remortgagers get free legals. The rate is below that of the best five year fix and at worst the rate can only increase to about 0.5% higher than the fixed rate. 'Part of the attraction of this deal,' explains Boulger, 'is that because it is a tracker as well as a cap, borrowers will benefit again when base rate starts to fall, which is likely to be in the first half of the 5 year term of this deal. This provides considerable comfort, as borrowers cannot be left high and dry on an expensive fixed rate.'
In a fix
It may be tempting to seek the security of a fixed rate deal but homebuyers must think carefully before taking the plunge with what looks like a bargain but may be a burden. Fixed rate mortgages can become more expensive than non-fixed mortgages if base rates fall during the term of the deal, leaving you tied in and unable to benefit from the cuts.
For the first time in nearly a year swap rates, which measure the cost of money for longer term interest rates, just as base rate does for short term rates, are now showing month on month falls. As a result a few lenders have recently reduced the cost of their fixed rate mortgages. Nathan explains: 'What this means for borrowers who are currently arranging a fixed rate is that, if they can, they might consider waiting just a few weeks before committing to a deal as there is every possibility that there could be a cheaper deal on offer. If this trend continues, it is highly likely that 2-year deals will fall below 5% again and fixed rates will start to become competitive once more. Our advice is very much wait and see for a little while and see how lenders respond. Even a 0.2% fall in rates would mean someone with a £100,000 mortgage would save over £150 a year.'
Variable benefits
Alternatively, discounted variable rate mortgages offer lower payments for an initial period. If the variable rate on which your discount rate is based falls, your repayments will fall. However, if the lender's standard variable rate rises, so will your repayments so it is crucial to keep an eye on the future and perhaps opt for a shorter term deal to avoid being locked into higher monthly payments.
Current best buys from independent Moneyfacts listings include a deal from Abbey of 4.19% for two years. But the maximum loan is low at 60% of property value and there is a fee of £499. West Bromich Building Society offers 4.23% for two years for loans of up to 80%. There is a fee of £395 but the package includes free accident, sickness and unemployment insurance for six months.
Figures correct as at 28 July 2004.
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