It’s mortgage misery for millions if you believe the gloomy predictions from the experts following the latest rate rise from the Bank of England.
The Monetary Policy Committee at the Bank has pushed up rates to 5.5 per cent from 5.25 per cent adding around £16 a month to the cost of the average £100,000 mortgage.
It doesn’t sound like a lot but £16 a month adds up to £192 a year which is starting to get a bit painful. And that’s only the extra you’re paying from this rate rise – since August 2006 the Bank has pushed up rates four times now. That takes you to a total of nearly £800 a year which is serious money.
Just to add to the gloom some experts are forecasting that 5.5 per cent won’t be the end – it could go to 6 per cent or even 7 per cent if you believe the doom mongers.
If rates hit 7 per cent someone on the average £100,000 mortgage would be paying another £1,200 a year on top of the rises they’ve already suffered. So what should you do? MoneyExpert.com is here to help you fight back.
Check your mortgage
If you’ve got a fixed-rate mortgage then you’re sorted until the term runs out. Find out how long your deal lasts and put a date in your diary six months before it is going to end to start searching for a new one.
Fixed rates mean your rate stays the same for the term of the deal no matter what the Bank of England does until the deal runs out.
But if you’re not on a fixed rate then it could be time to start looking at your options.
The big losers
Around four million of us are on what are called standard variable rate mortgages. These go up in line with moves in the Bank of England rate. If you are one of those people you can expect a letter from your mortgage company in the next couple of weeks telling you that from the start of June you’ll be paying more for your mortgage.
Standard variable rates also tend to be more expensive – currently the rates from the main lenders is around 7.24 per cent and that is likely to rise to 7.5 per cent once the lenders react to the Bank of England.
The best fixed rates are around five per cent so it doesn’t take a mathematical genius to work out that if you are on the standard variable rate you are paying over the odds. You could cut your monthly bills by around £2,000 a year on a £100,000 mortgage just by moving to a fixed rate.
Not all variable rates are losers
There are also tracker mortgages which, as the name says, ‘tracks’ or follows the Bank of England’s basic interest rate plus or minus 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.
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.
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.
Some lenders will also sting you with early redemption charges if you end a deal with them. Typically these are paid on fixed and discount deals and are there to make sure you don’t end the deal before its term.
However some lenders have tie-ins or lock-ins – they make you stay with the lender after the end of the special deal.
Navigating the mortgage maze
There are thousands of mortgage deals out there so there is no excuse for sitting there blindly accepting whatever deal your lender offers.
You can find a better deal but you need to search the whole market before making a decision. Click on MoneyExpert.com to find the deal that suits you.