Paris Hilton locked out – but could you be locked in?
World famous socialite and millionaire heiress Paris Hilton has reportedly been banned from visiting her sister’s new pad in L.A. in case she decides to copy the dÈcor for her own home.
Paris may now know what it feels like to be locked out of a home – but do you know what it’s like to be locked in?
Well that’s exactly what happens to some people who choose a fixed rate mortgage deal. You might agree a low rate, but you can be locked into their standard variable rate for some time after the original fixed deal expires, potentially meaning soaring repayments and more pressure on your disposable income.
What’s more, official figures show as many as 1.4 million people could be coming off fixed rate mortgages in 2008 – meaning the dreaded lock-in could be a reality for many of us. MoneyExpert will take you through the options.
Fixed-rate mortgages – how they work
A fixed rate mortgage does exactly what it says on the tin. You agree with your lender to pay a fixed interest rate for a set period of time – typically two or three years. During that period, whatever happens to interest rates elsewhere, you will always pay the same monthly repayments.
For example, if you fixed your mortgage rate today you might get a deal of 5% meaning your repayments on a £150,000 mortgage would be around £886 per month. The good bit is that even if the Bank of England raised interest rates to 7% over the next few years, you’d still pay the same £886 each month until your deal expired.
The bad news, of course, is that if interest rates went down to 3%, you wouldn’t benefit from the lower cost of borrowing and would have to continue to fork out your £886.
What’s the catch?
Most people are now aware that arranging a mortgage comes with fees – valuation fees, exit fees, arrangement fees, administration fees, porting fees…you name it. But one of the last remaining unknowns in the world of mortgages is the so-called ‘lock in’ or ‘tie in’.
In some cases, part of the deal when you sign up to a fixed-rate mortgage is that you agree to pay the lender’s Standard Variable Rate (SVR) for an agreed period of time after your cheaper fixed rate expires.
So, for example, you might have signed up to a two-year fixed deal of 4.65%, but with a two-year lock in. That would mean that you would then pay your lender’s SVR for two years after the fixed rate ends.
Why’s that so bad? SVRs are the highest mortgage rates on the market. They tend to be well above the Bank of England’s base rate and are not competitive products – so you’ll inevitably end up with far higher monthly repayments on your mortgage for the duration of the lock in, unless interest rates have gone down since you bought your fixed rate deal.
What should I do?
Go into any mortgage deal with your eyes open. Research the market carefully – and weigh up each deal based on the rate, fees and tie-ins together. You need to find best value for money, not just the best rate.
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