This is a warning to everyone with a mortgage. The rates on new mortgage deals are getting more expensive, and there is a plausible chance of UK base rates increasing. If you have a mortgage, you should check urgently if you can slice the rate down – you may gain £1,000s right now.
Less than a year ago the very cheapest 2 year fix was under 1%, the similar cheapest deal is now around 1.35%, and five year deals are up a similar amount too. This is happening because the City’s long term view of interest rates is rising.
In the short term too, many analysts think the UK base rate will rise soon. If it does go up by an expected 0.25 percentage points, anyone on a variable-rate mortgage will pay almost £200 a year more per £100,000 of outstanding mortgage.
Huge savings are possible though, especially for the millions on their lender’s standard variable rate (SVR) - the default rate most fixes and trackers revert to when the intro deal ends. For example, someone moving a £150,000 mortgage from 4% SVR to the two-year fix at 2% would save over £3,000 over two years even taking some fees in to account.
Here's your 5 steps to finding the cheapest deal…
1) Check your current mortgage details
Dig out the details of your existing deal. You’ll need to know…
a) What's the rate? And find your monthly payments and outstanding debt.
b) What type is it? Fixed, tracker, discount, SVR.
c) When's the intro deal over? Eg, when does the 2yr fix end exactly?
d) How long's the full mortgage term? When must it be fully repaid? Eg, in 10, 15, 25 years.
e) Will I be penalised? Any early repayment/exit penalties?
Critically, work out your current loan to value (LTV) - the proportion of your property's CURRENT value you're borrowing. Eg, £90k on a £100k property is 90% LTV, lower is better, and this has a big impact on the rate you can get.
2) Benchmark your cheapest deal with a mortgage comparison
For an easy benchmark of what’s available in your circumstances, start with a comparison site that includes all deals, including ‘direct only’, those that aren’t offered by broker. These include my mortgage comparison at www.mse.me/mortgagecompare and www.moneyfacts.co.uk has one too.
3) What counts these days is whether you’ll be accepted
The good/bad old days of easy credit where lenders would fling out deals to all and sundry are long gone - getting accepted is today’s challenge. This has two key elements...
Is your credit score good enough? Your credit history is a huge part of whether you'll be accepted for any type of credit, including a mortgage. So be careful before applying not to make too many applications for other credit, and never miss a repayment. To find your credit worthiness for free use www.mse.me/creditclub.
Are the repayments affordable? For the past couple of years, lenders won’t just check if you can afford the monthly repayments at the current rate, but they’ll also stress test affordability if rates were 6% or 7%.
If you’re close to the financial limits, reel in your spending months before applying, as lenders will want evidence of income, big bills, expenses and even eating out.
Mortgage brokers have access to information not available to consumers that helps them see which mortgages you’re most likely to be accepted for. For face-to-face help then ask friends for a local broker recommendation or use www.unbiased.co.uk or www.vouchedfor.co.uk to find one. There are also fee free brokers (that take a commission from the lender) available on the phone such as www.landc.co.uk.
4) Got savings? They could get you a better mortgage
For each 5% lower your Loan-To-Value (LTV) usually until 60%, the cheaper the deal, so borrowing a little less can have a big impact on your rate.
For example, if you've a £150,000 home, and want a £137,000 mortgage, that's 91% LTV, and the top five-year fix is 3.75%. Yet use £2,000 of savings to reduce the borrowing, and you'd then be at 90% LTV – where the top five-year fix is 2.19%, saving c. £1,300/year in payments.
5) To fix or not to fix?
Fixing gives you price and budgeting certainty that the rate won't move for a set time. Variable deals move with the UK interest rate (and sometimes just at the provider's whim). Generally you pay a little more to fix, but not much.
Ask yourself how much you think rates will rise over the period. If peace of mind that you can afford to pay is what’s important for you, err on the side of fixing, and fixing for longer – and right now with fixed deals being outrageously cheap this is a good time to look at it.
For more help my 60 page free remortgaging booklet is available at www.mse.me/remortgage.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.
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