ACROSS the UK some two million homeowners are set to come off low fixed-rate deals in the next 18 months, and could see their interest rate shoot up from around 4.5% to around 7.6% unless they take action. Given the recent US-triggered global credit crunch, it seems likely that tens of thousands more home buyers may also be pondering their mortgage options.
Melanie Bien, director at independent mortgage broker Savills Private Finance (SPF), said: "Many people will be coming off cheap fixed rates in the next few months and worrying about higher monthly bills. If you are on a tight budget and need certain
ty, a fixed rate is the answer - even if they are initially slightly more expensive compared with discounts or trackers."
The impact of the current crisis for 'prime' mortgage shoppers is, as yet, less clear-cut. Bien thinks that rates may have peaked. However John Postlethwaite, a principal at the Edinburgh office of Punter Southall Financial Management (PSFM), believes there may be one more rate rise to come before Christmas. Both believe that as long as there is no more "unwelcome" news, borrowers who can afford to wait will see lower fixed-rate deals next year.
Charges Those shopping for a new deal also need to be aware of the increasingly high level of fees applied to mortgages.
A couple of years ago fees for arranging, or booking, a mortgage product typically averaged around £200-£400. Now fees in excess of £1,000 are not unusual and several mortgage providers, Yorkshire Building Society among them, have products which take their fee in the form of a percentage of the sum being borrowed. This means someone borrowing £120,000 on YBS's new two-year fixed-rate deal would pay a fee of £2,400.
Indeed, research from mortgage broker Mform found that once fees are taken into account, the best deal may not be the one with the lowest interest rate. It said that Cheltenham & Gloucester currently offers a two-year fixed rate at 5.29% and another at 6.33%. However, because the fee on the 6.33% deal is only £99, someone borrowing £150,000 would pay a total of £18,689 over the two years, while someone opting for the seemingly lower 5.29% product would pay £20,119. The 5.29% deal costs more because the fee for this mortgage is 2.5% of the loan value: £4,249.
The seemingly more expensive deal is therefore actually cheaper: the total sum paid over two years on the 6.33% is £18,689, compared with £20,119 for the 5.29% offer.
Trac
ker & discounted
A tracker mortgage, as the name suggests, is one which tracks the Bank of England base rate, moving up or down with it. A discounted mortgage offers a discount off either the Bank of England rate, or a provider's standard interest rate for an introductory period. It will also move up or down with this headline rate.
Homeowners confident that they could absorb any further rise in base rates into their monthly budget will find Direct Line offers the best-buy two-year discounted loan at 5.47%, which gives a 0.28% discount off Bank of England's 5.75% rate.
Meanwhile, Alliance & Leicester had the best five-year discounted mortgage, at 5.57%, which is linked to its standard variable rate, currently 7.89%, and undercuts it by 2.32% according to financial information group Moneyfacts.
The fee for the Direct Line product is £599, and that on the A&L mortgage is £1,499.
Capped
In es
sence, a capped mortgage allows a homeowner to benefit from any fall in base rates while simultaneously protecting them if rates rise above a pre-agreed 'capped' level. These are suitable for anyone who needs to protect against their mortgage rate spiralling ever upwards, but would still like to leave themselves open to a lower rate should rates fall instead.
Homeowners who opted for a capped-rate loan in the summer of 2006 would have protected themselves from much of the rise in the Bank of England base rate of the last 13 months. Borrowers who snapped up Coventry Building Society's two-year capped rate at 4.99%, are now paying almost 3% less than the average standard mortgage rate.
The best-buy capped-rate loans last week, according to Moneyfacts, were National Counties Building Society at 5.9%, capped until the end of July 2010, and Yorkshire Building Society at 6.24%, also capped for three years. The former deal has an arrangement fee of £595 and the latter £795.
Fixed
Fixed
rates offer a degree of safety to homeowners who want the security of knowing what their monthly mortgage repayments will be for an extended period. In the last year, as base rates have increased, the interest rates on fixed-rate deals have also climbed. In the last few weeks, however, some providers have started to cut their rates.
There are two types of fixed-rate loan: those with extended penalties and those without. The former generally offer the lowest interest rates, such as the best-buy deal of 2.65% offered by Newcastle Building Society last week. However, there is a sting in the tail, in the form of extended tie-ins, as these loans typically lock borrowers into a much higher interest rate once the introductory offer period has come to an end, usually an additional two years.
In the case of the Newcastle deal, the lock-in interest rate lasts until 2013, and is currently 7.84%. This would mean that someone taking out the Newcastle loan with a 20-year £150,000 repayment mortgage would pay £813 a year for the first 12 months, and then £1,258 for the next four years. The only way for the borrower to get out early is by paying a penalty fee, which can be as high as 11% of the outstanding mortgage loan.
Fixed-rate loans with no extended penalties offer much greater certainty and allow borrowers to move on to a new loan once the fixed-rate period expires. The best two-year fixed-rate deals last week, according to Moneyfacts, were Britannia Building Society at 5.49% and Giraffe Money at 5.63%.
For homeowners seeking longer-term security, Halifax and Norwich & Peterborough Building Society are both currently offering 25-year mortgages at 6.39% and 6.38% respectively. The former has an arrangement fee of £599, while the fee for the N&P deal is £385.
Alternatively, Halifax, N&P and Woolwich have 10-year fixes at, respectively, 6.29%, 5.88% and 5.89%.
Offset
Offset mortgages
give homeowners the flexibility to link the balance on a current or savings account to their mortgage. This means that if someone has savings of £5,000 and a mortgage of £120,000, they would only pay interest on £115,000 of their mortgage loan, for as long as that £5,000 remains in their savings account.
The end result is that homeowners who forego interest on their savings, or current account, can pay off their mortgage more quickly.
The best offset deals last week were Yorkshire Building Society at 6.2% and Woolwich at 6.23%.
Alternatively, both Standard Life Bank and Intelligent Finance have introductory offers at present. The Standard Life product has a discounted rate of 5.74% for two years, rising to 7.31% thereafter, while the Intelligent Finance mortgage has an interest rate of 5.85% until November 2009, rising to 7.25% for the remainder of the loan.
Flexible features
Most o
f the mortgage products on offer today come with an array of flexible features built-in. Some deals offer cashback, which can be particularly attractive to first-time buyers struggling to furnish their new home.
Mortgage providers also increasingly let borrowers overpay or underpay on their loans, as well as take their mortgage deal with them when they move.
The Halifax 10-year loan mentioned above is typical in allowing the borrower to overpay up to 10% of the value of their loan each year, penalty-free. It also allows those who have overpaid to underpay if their circumstances change.
Mortgage brokers
Moneyfa
cts produces a table of mortgages which shows the real cost of a particular mortgage deal, taking into account all fees, charges and tie-ins. However, given the increasing complexity of the mortgage deals on offer, borrowers might find it easier to use a mortgage broker. Brokers may also be able to access deals not available on the high street.
John Postlethwaite, of PSFM, says his favourite deal right now is a tracker from Lloyds TSB only available through intermediaries which tracks the Bank of England base rate at plus 0.17%. John Charcol also offers a fee-free lifetime tracker mortgage which tracks the Bank of England rate at plus 0.17%, giving the same current interest rate of 5.92%.
Bien's favourite deal is also only available through an adviser. It is SPF's own discount deal, offering a 0.79% discount off the Bank of England base rate, giving a current interest rate of 4%.
