Here’s a quick and easy guide to fireproofing your finances in the face of ever-changing interest rates
Mortgage rates are near all-time historic lows and have been for a couple of years, and we’ve got used to that. Yet there is a plausible chance that 2017 is the year that will change. We’ve already seen some cheap deals such as HSBC’s 0.99 per cent two-year fix being pulled. The five-year swap rates have increased from 0.35 per cent back in September to 0.9 per cent now – and we’re already seeing longer fixes start to get more expensive on the back of this.
Of course, there’s no certainty here. Yet UK rates are so cheap that even if things reversed and they dropped again, the likely gain to mortgage holders would be limited. But if they did rise, the cost could be huge.
The savings available right now can be huge. Kpera e-mailed me: “Fixed at 1.24 per cent for 2 yrs, reduced term to 13 yrs without paying much more a month. Will be saving about £20,000 even after fees. Thanks.”
So this is my clarion call for all mortgage holders, to check now if you’re on the cheapest deal, and, if not sort, it. Here’s what to do to find your cheapest deal.
How much could I save?
If like many people you’re on your lender’s standard variable rate (SVR) – the default rate most fixes and trackers revert to when the intro deal ends – then the savings can be huge. Most SVRs are at 4 per cent or higher. Yet the cheapest two-year fix is just 1.2 per cent (you’ll need a top credit score and it’s got a big fee). Five-year fixes start at around 1.8 per cent. All, of course, depend on how much of your home’s value you’re borrowing.
So someone moving a £150,000 mortgage from 4 per cent SVR to a two-year fix at 1.2 per cent would save £4,000+ over two years, even after fees.
Quickly find what deals are available
For an easy benchmark of what’s available in your circumstances, start with a comparison site that includes all deals, including “direct only”, which aren’t offered by brokers. Full market comparisons include my own www.MoneySavingExpert.com/mortgagebestbuys, and www.totallymoney.com’s mortgage tool.
Finding a cheap deal isn’t the end – you need to get accepted
The days when lenders would fling out deals to all and sundry are long gone. Getting accepted is now the challenge. There are two key elements to this:
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 take precautions. Avoid any applications that leave a footprint on your file – such as credit cards, contract mobile phones or monthly car insurance – in the few months before applying for your mortgage. Never withdraw cash on credit cards or take payday loans.
For full help on this, join my free Credit Club www.mse.me/CreditClub, which gives your credit score, affordability score and tells you what needs improving.
Are the repayments affordable?
For the past couple of years, lenders haven’t just checked if you can afford the monthly repayments at the current rate, they’ve also stress tested affordability if rates were 6 per cent or 7 per cent. Crucially, this doesn’t only apply to new mortgages, it’s also for remortgages too (which is ridiculous, and on a side note, I am campaigning against this). So if this is a problem, it’s important to reel in your spending months before applying. Lenders will want evidence of income, big bills, expenses and even eating out.
Use a mortgage broker to match your situation to a top mortgage
The information about what different lenders are looking for isn’t available to the general public.
But it’s something that most mortgage brokers have – and, of course, their job is to find you the best product.
So they’re a good way to work out what the best deal available to you is. Yet do ask if the broker will check all deals available to them and not just use a panel of lenders. Also, check how much it will cost and use a qualified one.
Some phone-only brokers such as www.LandC.co.uk are fee-free. If you want face-to-face help, ask friends for a local recommendation or find one via www.unbiased.co.uk or www.VouchedFor.com.
Don’t ignore the fees
The smaller your mortgage, the bigger the impact of fees. A good way to compare mortgages is to divide the fee across the discount or fixed period. So a £1,200 fee on a two-year (ie, 24-month) deal is £50 a month. Then add that to the monthly repayment.
I designed a “Total Cost” tool that does this automatically for you within the www.MoneySavingExpert.com/mortgagebestbuys comparison.
Fix or variable rate?
A fix’s advantage is that you get price and budgeting certainty that the rate won’t move for a set time, whereas variable deals move with the UK interest rate (and sometimes just on 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 safety’s what’s important to you, err on the side of fixing, and fixing for longer. Right now with fixed deals being outrageously cheap, it’s a great time to do it.
Got savings? They could get you a better mortgage
For this, you need to find your current loan-to-value (LTV) – the proportion of the value of your home you’re borrowing, so £80k on a £100k property is 80 per cent LTV. At every 5 per cent LTV threshold, from 95 per cent down to 60 per cent, deals tend to get better, so a little extra can have a big impact on your rate.
For example, if you’ve a £150,000 home, and want a £137,000 remortgage, that’s a 91 per cent LTV, and the top five-year fix is 3.98 per cent. Yet use £2,000 of savings to reduce the borrowing, and you’d be at 90 per cent LTV – where the top five-year fix is 2.54 per cent, saving c. £1,100/year in payments.
Martin Lewis is the Founder and Chair of Money Saving Expert. To join the 12 million people who get his Martin’s Money Tips weekly e-mail, go to www.moneysavingexpert.com/latesttip