Homeowners miss cheaper loan deals

Experts are mystified as to why more homeowners haven't unlocked their mortgage and taken a cheaper loan. Picture: TSPL

Experts are mystified as to why more homeowners haven't unlocked their mortgage and taken a cheaper loan. Picture: TSPL

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HOMEOWNERS in Scotland are missing out on a golden opportunity to slash costs by failing to take advantage of rock-bottom mortgage rates, it has been claimed.

Experts say there’s never been a better time to remortgage, yet the number of borrowers switching to cheaper deals remains low. Mortgage costs have reached new lows in recent months as lenders have passed on some (but not all) of the cheap borrowing they’re enjoying through the Funding for Lending Scheme (FLS).

There are significant savings on offer for borrowers with a decent amount of equity in their homes but stuck on their lender’s standard variable rate (SVR), according to figures produced for Scotland on Sunday.

But while remortgage lending rebounded by 15 per cent in March, the Council of Mortgage Lenders has revealed, it was still 14 per cent down from the same month last year and far lower than historical levels.

So although there have been signs of improvement, experts are mystified as to why more homeowners haven’t switched to cheaper loans at a time when household finances are squeezed.

“Many people are paying too much,” said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh. “They hear that the banks are not lending and don’t actually look at the rates available.”

And those rates offer potentially big savings for borrowers able to switch, particularly those on their lender’s SVR.

The average SVR is currently 4.88 per cent, according to Moneyfacts, with the cheapest at 3.49 per cent (Stafford Railway Building Society).

In contrast, the cheapest two-year fixed rate deal if you’ve got a deposit of 40 per cent is 1.74 per cent, offered by both Chelsea Building Society and Royal Bank of Scotland. Over five years, the lowest rate at 60 per cent loan-to- value (LTV) is 2.49 per cent, courtesy of both HSBC and Clydesdale Bank.

At 75 per cent LTV there are still far cheaper deals than the lowest SVR. The best two-year fix is 2.24 per cent from the Chelsea, while a clutch of building societies offer 2.49 per cent. Over five years, borrowers with 25 per cent to put down can get a fixed rate of 2.84 per cent (the Chelsea) and 2.89 per cent from several other lenders.

Even those with deposits of just 10 per cent may be able to cut their mortgage costs by switching from an SVR to a fixed rate. The cheapest 90 per cent LTV mortgages over two years are priced at 3.59 per cent (the Chelsea again) and 3.64 per cent (Barnsley Building Society, HSBC). Over five years, there are 90 per cent LTV fixed rates as low as 4.19 per cent (First Direct) and 4.2 per cent (Hanley Economic Building Society).

With arrangement fees often coming in at around £999 or more, it pays to look closely at the real cost of a mortgage, but it’s homework that may be well worth doing.

“Unlike back in 2010, great rates can be secured at all loan to values, even at 90 per cent, while 75 per cent LTV would be a good benchmark to aim for with rates starting at around 2.45 per cent,” said Mitchell.

It’s no surprise that lenders are competing so keenly for the business of less risky borrowers.

Sylvia Waycot, spokeswoman for Moneyfacts, pointed out that lenders have borrowed from the FLS on the proviso that they lend it out for mortgages.

“If the first-time buyer market is still struggling to find deposits or waiting for new builds to materialise, then lenders are going to have all this money burning a hole in their pockets,” said Waycot.

So why aren’t more people remortgaging? A lack of confidence in the housing market is one factor, according to ­Mitchell.

“I think there is reluctance to remortgage as people believe that they aren’t going to get a better deal or, indeed, a deal at all,” she said.

There also remains a perception that SVRs are cheap, even though lenders have raised them since the Bank of England slashed base rates to 0.5 per cent since 2009.

“Then there’s the perceived hassle and the expectation that borrowers will incur a load of fees, which is not always the case,” said Robin Purdie, director of Mov8 Financial in Edinburgh.

Yet the advantages of securing a better deal can be considerable. The lower monthly repayments are an obvious case in point, and there’s the opportunity to clear the mortgage quicker too. Lower rates can also help people get back on track financially at a time when other household costs are rising.

“By remortgaging now onto a lower rate, many people can come off interest-only mortgages, overpay and reduce capital balances, so a ‘true’ benefit will be felt when rates rise in the future as they are charged interest on a lower balance and reduce the term of their loans,” said Mitchell.

Of course, it is possible that mortgage rates will continue falling, making it worth holding off remortgaging for the time being. But if you believe they’re unlikely to fall much further, if at all, it makes sense to consider fixing for as long as you can.

If you do remortgage, it doesn’t have to entail switching lenders, Purdie pointed out. “Many lenders now offer excellent ‘retention’ products, and these should always be the first things considered, and only then compared with the best alternatives from the market,” he said.

“Even with fee-free remortgages the borrower is still likely to incur an additional admin fee to close the mortgage and a telegraphic transfer fee charged by the new lender.”

Either way, it’s a good time to review your mortgage, even if you decide to stay put.

“Now is the time to take stock of your mortgage, look at what you have and, if there is scope to overpay – reducing the capital balance faster – to take advantage of lower rates,” said Mitchell.

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