Homeowners struggle with the mortgage blues

Homeowners are sweating over mortgage bills this year as Bank of England Governor Mervyn King warns another rise in interest rates is firmly on the agenda.

The Bank has already raised interest rates by quarter-points in August, November and January adding around £500 a year to the cost of the typical mortgage. Now the Bank warns that inflation worries mean at least one more rise is highly likely this year.

Borrowers with fixed rate mortgages have no worries. But many of those with variable rate deals will be feeling the pinch. The prospect of another rate hike after the one in January could make them think about switching their mortgage to a fixed or capped deal, or just find a cheaper variable rate deal.

The certainty of these deals might be reassuring. But what do you need to consider? And how do you find the right deal? Moneyexpert.com shows you how.

Don’t pay the penalty

Lenders can impose penalties for pulling out of mortgage deals earlier than the agreed terms. If your mortgage has redemption penalty then you’ll have to pay and the bill can run into the thousands – typically it can be a few months interest. So check the terms of your existing deal before making the move.

You might get a better rate by switching a mortgage. But set that against the cost of redeeming your current deal early.

If you have no redemption penalties, or they are so low that switching is not too costly, you should check out what is on the market.

What goes up must come down

You will have to decide what type of mortgage you want. If you are worried about interest rates going even higher over the next few years, then you should look at fixed rate mortgage deals. That will mean your monthly payments will not go up.

But there are also plenty of reasons to think interest rates will come down in the next few years. The Bank of England expects inflation to fall in 2008 and interest rates could fall. You might be happy switching to another variable rate mortgage, especially if you can get a discount on the standard variable rate for a few years.

Getting in a fix

The fixed rates available on deals go up or down depending on where mortgage lenders expect rates to go over the next few years. If the markets expect higher rates, then fixed rates will be higher, and vice versa.

The longer the term you go for, the higher the rate will be – players in the money markets have to cover themselves against the uncertainty of knowing what rates will be further ahead.

You have to decide if you are comfortable with the fixed rates currently available, bearing in mind the comfort of knowing exactly what your repayments will be.

A quick look at Money Expert mortgage service shows that current fixed rate deals can be as low as 2.25% for two years. But beware of the tie-ins – after the fixed rate period ends, you can be tied in for several years on the lenders’ standard variable rate.

Put a cap on it

If you think interest rates might fall, but are also worried about interest rates going higher, you might want to take advantage of a capped rate mortgage – the rate can only go as high as the capped rate but will track the lender’s variable rate or the Bank Base Rate downwards, too.

While capped rate deals may seem like the perfect solution, everything comes at a price. Make sure you check out the charges, tie-in periods, redemption penalties and what the capped rate actually is.

Getting out of a fix

If you are on a fixed rate deal then interest rate hikes will not affect you. But if your deal is coming to an end this year and you have no tie-ins, you will have to consider what deal you take out next.

You need to consider all the issues outlined above and go for a deal you find comfortable with.

Taking a bet

Nobody has a crystal ball that can tell them what interest rates are going to be over the next few years.

You have to weigh up the risks. Going for a variable rate could pay off, especially if you get a discount in the early years and interest rates fall in the next few years.

But if you are genuinely worried about interest rates going higher, then go for a fixed rate deal. Even if you have to pay a little bit more for the guarantee of knowing what you will pay each month, always remember that a few hikes in interest rates can have a life-changing impact, especially if you have a large mortgage.

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