John Myers, Head of Mortgages
The problems in the mortgage market persist. Rates and fees are still on the up, which is not good news for anyone looking for a home loan.
Woolwich, Barclays' mortgage arm, recently withdrew all of its two-year fixed rate mortgage deals from the market in an effort to 'control customer volumes' while at the same time nearly doubling the fees on its tracker deals from £595 to £995.
Nationwide, the UK's biggest building society, has also increased rates on some of its deals by up to 0.5% blaming increases in money market rates, while Halifax, the UK's biggest mortgage lender, also increased its fixed rates, by as much as 0.5%. The woe for homeowners continued when First Direct, the internet and phone banking division of HSBC, raised the cost of what was previously Britain's cheapest two-year fixed mortgage from 5.49% to 6.15%.
The situation is getting so desperate that when competitive products are released they are not lasting long. Bristol & West, the British mortgage arm of the Bank of Ireland, launched 29 products two weeks ago and withdrew seven of them just days later due to unprecedented volumes of business. On Tuesday the Bank of Ireland withdrew its entire mortgage range and introduced new rates of up to 8.09%.
The average cost of a two-year fixed rate mortgage has risen 0.11 percentage points to 6.51% according to moneysupermarket.com. Since the beginning of the year the cost of fixing your mortgage for two years has gone up by around one percentage point even though interest rates have fallen 0.75 points since December.
New figures from the British Bankers' Association revealed that the number of mortgages approved in May was 20% lower than in April, and 56% lower than in May last year.
Many homeowners have turned a blind eye to the warning signals, preferring to coast along on previously agreed fixed rate terms and adopting a 'wait and see' approach in the belief that falling interest rates might turn the tide, and that better deals will pop up. But time is running out for many - £30billion of fixed rate mortgage deals are due to come to an end next month and an estimated 1.4million borrowers will come off fixed rate deals before the end of the year. Yet, in a poll carried out by moneysupermarket.com, 51% of borrowers whose deals are due to end in the coming months, have not yet started to look for a new mortgage.
Unless these borrowers act quickly they will be moved on to their lender's standard variable rate (SVR). The typical SVR is 7% and with the best fixed rates around 4.5% this time two years ago, someone with a £150,000 25-year repayment mortgage, could see their repayments jump from £834 a month to £1,060.
Even though mortgage rates are more expensive than a few months ago because of the ongoing credit crunch, most borrowers will still find it is worth remortgaging in order to minimise the payment shock.
What options are available?
Mortgage offers remain valid for between three and six months, so even if your current deal isn't due to end until later in the year, it is still worth looking around for a new mortgage now.
The first thing to do is contact your existing lender as most will offer an alternative product for you to move on to at a rate lower than the SVR. The advantage of sticking with the same lender is that you will not have to pay an exit fee. This charge covers the administration costs of closing a mortgage account and can be as much as £295.
However, once you have found out what your current lender will offer you, it is important to compare that with the rest of the market as you may find a more competitive deal available elsewhere.
Even though the average rate on a two-year fix is now above 6.5%, there are still some lower rates available.
With inflation rising on the back of higher food and oil prices, many economists now expect the next move in Bank rate to be upwards. The Monetary Policy Committee has kept Bank rate unchanged at 5% since April, but with inflation running at 3.3% - 1.3 percentage points above the 2% target - it is likely to increase the rate in the coming months.
Consequently, demand for fixed rate mortgages is rising as borrowers seek to protect themselves against this risk. If you would prefer the security of a fixed rate, Chelsea building society has the lowest rate at 5.95%. The deal is only available on loans up to 75% of the property's value and the arrangement fee is 1.5% of the loan size.
Another option is Yorkshire building society's two-year fix, at 5.99%. The fee is £1,995 and, as with the Chelsea product, it is only available on loans up 75%, but those remortgaging receive a free valuation and free legal work.
For those wanting longer term security, Yorkshire is also offering a five-year fix at 5.99%. The deal is available for loans up to 75% but the arrangement fee is £2,495 and there are no freebies for remortgages. Alternatively, Scottish Widows Bank has a five year fix at 6.19% with a £1,999 fee for loans up to 75% and this deal includes free legal work and £250 towards the valuation costs for those remortgaging. Britannia building society has a five year fix with a slightly higher rate of 6.24%, but the arrangement fee is significantly lower at £499. There are no freebies, but this could work out cheaper for those with small mortgages who need to remortgage.
However, while many people will prefer the security of a fixed rate deal in the current climate, if you can afford for your mortgage payments to rise should interest rates go up, variable rate deals are still worth considering.
HSBC has a two-year discount with a rate of 5.43%, more than half a percentage point lower than the leading two-year fixed rate. The arrangement fee is £999 and the deal is available for loans up to 90% of the property's value. Those remortgaging receive a free valuation and free legal work.
HSBC is also offering the market-leading lifetime tracker. The rate is 0.79 percentage points above Bank rate, giving a current rate of 5.79%, and it is available up to 90%. There is a £599 arrangement fee and a free valuation and free legal work for those remortgaging. One big advantage of this product is that there is no early redemption charge so you can remortgage at any time without penalty. HSBC is also one of the few lenders not to charge an exit fee to customers who redeem their mortgage.
Have your say: If your mortgage is about to end and you are worried that you won't be able to afford the higher cost of a new deal, or if you are struggling to get another mortgage because you don't have much equity in your home or have an impaired credit rating, visit our forum and let us know as other members may be able to help.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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