Don't let fate find your rate

Think about moving your mortgage before costs rise, says Tricia Phillips

These are uncertain times for mortgage borrowers
These are uncertain times for mortgage borrowers

These are uncertain times for mortgage borrowers – for the first time since spring 2009, experts are predicting there is a growing chance that we will see a base rate rise in the next six months.

In fact, following the ‘No’ vote in the Scottish referendum, some people are even suggesting that there could be a rate rise before the end of 2014.

Understandably people are confused by the mixed messages and many don’t have a clue what to do for the best. Those on variable-rate mortgage deals are wondering if it’s time to fix their rate.

There is no right or wrong answer here, it really depends on your individual circumstances and your household budget.

But the crucial thing is to get advice and guidance from a mortgage expert who can compare the whole market and go through all your options to help you find the best product for your needs.

Andrew Hagger, independent financial expert from website Moneycomms.co.uk, says: “Whether you decide on a variable or fixed-rate mortgage should come down to your own financial situation.

“If your household finances are quite tight and you’d find it difficult to cope with increased monthly mortgage payments then a fixed-rate mortgage will give you the certainty of payments and peace of mind.

“On the other hand, if you’re on a very low variable rate at present and can absorb the impact of a couple of interest rate rises, then you may wish to stick with your existing mortgage deal for the time being.”

Research from Nationwide Building Society shows that, worryingly, almost half of people with a mortgage don’t know what interest rate they are currently paying and more than a third of those on a fixed-rate deal have no idea when the term ends.

With the possibility of a rate rise in the not too distant future, now is the time to do your homework and get your household finances in order. here’s how fixed, tracker and standard variable rate mortgages compare, with the pros and cons of eac, to help you find the right type of mortgage to suit your finances.

Fixed-rate Mortgage

The interest rate is fixed for a set period of time, usually for two to five years, although you can also get sixyear and even 10-year deals.

Fixed-rate mortgages are still very low in a historical context, when you compare against the average rates over the last 20 years where it was said you were getting a good deal if you managed to get a five-year fixed-rate mortgage below 5%. Things have changed since the base rate slumped from 5.5% to 0.5% in the 13 months to March 2009 and there are excellent deals to be had.

  • PROS: Your monthly payment won’t change for the term of your fixed rate, even if the base rate increases.

  • CONS: If interest rates fall, your rate remains fixed and you won’t benefit from rate reductions. Be aware that should you need to repay your mortgage before the end of the fixed-rate period, you are likely to have to pay an early repayment charge of anything between 1% and 5% of your outstanding balance.

 

Tracker Mortgage

These are variable-rate mortgages that usually move in line with the base rate, so if it goes up or down, your repayments will follow in the same direction. These mortgages are not ideal if your budget has little room for manoeuvre when rates rise, however, you are less likely to face an early repayment charge.

  • PROS: You can take advantage of low interest rates and often have the flexibility to switch to a new product to suit your changing needs.

  • CONS: You are at the mercy of the movements in the base rate and could see repayments shoot up.

STANDARD VARIABLE RATE MORTGAGE

A standard variable rate (SVr) mortgage is a lender’s default rate and usually a temporary measure or last resort. When your fixed, discount or tracker mortgage deal expires, you will usually be transferred automatically onto your lender’s SVr if you don’t have something else ready to switch to.

The problem is that you are at the mercy of your lender, which can raise or lower its SVr at any time – although in the majority of cases,rate changes tend to be influenced by changes in the base rate.

Unfortunately there are some customers who are unable to move to a fixed or tracker rate because they have a poor credit record. This is often down to circumstances beyond their control but unfortunately, they are stuck on an uncompetitive rate. These people are often referred to as mortgage prisoners.

  • PROS: It can be the only option for those who have poor credit histories and, under the tough mortgage lending rules, will struggle to switch to a more competitive deal.

  • CONS: You are at the mercy of a lender’s whim on what rate they charge and when they want to increase it. And the rates charged are usually a lot higher than more structured deals.

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