Inflation is at 3.1 per cent and the Governor of the Bank of England Mervyn King is on an official warning. He’s had to write a letter of explanation to Chancellor Gordon Brown on why inflation has gone up.
He’s having to apologise but it’ll be the rest of us mortgage holders who will be feeling sorry if as expected interest rates go up by another 0.25 per cent on May 10th. That’ll be the fourth rise since August 2006 taking interest rates to their highest level since April 2001.
Anyone on a variable rate mortgage will have seen their costs rise by an average £500 a year. Another rise will add another £170 a year to that which is a gloomy way to go into the summer.
But it doesn’t have to be that way if you follow MoneyExpert.com’s guide to beating the mortgage blues and making your money work for you. The first thing to bear in mind is that rates at 5.5 per cent are still way below the dark days of the late 80s and early 90s when they briefly hit 15 per cent.
And look on the bright side – the higher interest rates go the higher the pound will go against the dollar. So if you’re heading for the US your pound will go further and if you follow our tips you’ll keep your mortgage costs down too.
Don’t just sit there
You don’t have to accept rate rises although around four million of us do. Those are the people who are paying the standard variable rate to their mortgage lender. The standard variable rate or SVR is the basic mortgage rate quoted by lender. Currently they are around 7.24 per cent.
If you are on the standard variable rate then you’re in a great position to beat the rate rises as all you have to do is move to a better deal. And compared with standard variable rates almost everything is a better deal.
There’s still plenty of time
There’s a lot of talk about all the good deals disappearing as mortgage companies withdraw their top loans and push up rate ahead of the Bank of England decision. And it’s true that some of the good deals are being pulled or placed on withdrawal notice which means they’re about to be pulled.
The good news though is that if you get a mortgage offer now that it will last for three to six months. And it’s possible to get a decision in principle very quickly over the phone if you are remortgaging. You can if you’re organised get a deal now before they are withdrawn and hang on to it for three to six months.
Fix it up
Everyone likes peace of mind. That’s why fixed mortgages are the most popular type of mortgage around. They’re very simple – a fixed mortgage ties you into a pre-arranged interest rate for a set period of time, often two or three years. There are some for five, 10 or even 25 years, but these are less common.
Most people choose fixed rate deals because they feel safe in the knowledge that their repayments won’t change at all for that period. They know exactly what they’ll be repaying on a monthly basis and can relax knowing their mortgage is covered.
There is one note of caution – when fixed rate deals expire, you’ll automatically be put onto your lender’s standard variable interest rate, which is typically much higher than the other deals. Unless you actively go out there and select a new fixed rate or other deal, your repayments will rocket until you can agree a new arrangement with a lender.
Lenders have increased the administrative charges on applying for fixed rate mortgages by around 20% in the past six months. However there are still good deals to be had. It’s possible to get fixed rates deals currently for around 5.29 per cent or so. If you’re paying 7.24 per cent on a standard variable rate then that’s a massive saving of around £2,000 a year.
Track a deal down
A tracker mortgage does what it should do – it ‘tracks’ or follows the Bank of England’s basic interest rate plus a certain amount for a set period. That decides how much you pay every month.
Every time the Bank puts rates up your rate goes up too. Trackers can be cheaper than fixed-rates, but if the Bank’s base rate continues to go up this may change.
Don’t discount a deal
You can also look at discount mortgages. Again they’re pretty straightforward. You get a discount on the lender’s standard variable rate for a set number of years – usually two or three. If for instance the standard variable rate is 7.24 per cent and you get a two per cent discount you’ll pay 5.24 per cent.
Put a cap on it
Capped mortgages set a maximum limit you’ll pay for a set number of years which again gives you some certainty. But it’s not totally safe because the mortgage rate you pay will go all the way up to the cap.
Watch out for penalties and fees
Nothing is free so you’ll have to pay fees if you remortgage including possibly legal and surveyors fees. The good news is that a number of lenders offer fee-free deals so if you don’t think you can afford the fees you should look out for these.
Also some lenders will let you add the fee to the cost of your loan. That will mean paying interest on the fee but it can be a price worth paying.
Don’t panic – but get moving
Remortgaging is straightforward and should not take too much of your time. It makes sense to take advantage of the time you have before rates go up to check out your options at MoneyExpert.com.