Despite the fact that base rate has stayed put for more than three years at its rock-bottom 0.50%, and shows no sign of rising in the near future, the cost of mortgages is rising.
Here we look at at how homeowners can protect themselves.
Banks’ SVR hikes around the corner
Halifax, the Co-operative, Clydesdale and Yorkshire banks will all hike up their Standard Variable Rates (SVRs) from May 1, while the Bank of Ireland will start the first of two rounds of increases from June.
This means existing customers of these banks who are not on a particular deal, such as a fix or tracker, will see their monthly mortgage payments increase.
Overall, the average increase in these SVRs is 0.62%, which will slap an extra £52.58 on to the cost of even a relatively small mortgage of £150,000.
RBS and NatWest have also announced they will be upping the rates on their Offset and One Account mortgage deals to bring them in line with their 4.00% SVR – a move that will also take effect from May 1.
TOP TIP! Swot up further on the recent SVR hikes with our article: Why now is the time to remortgage.
The only way is up?
Even if you are not among the estimated one million affected customers with these banks, you may not be able to escape from the rising cost of mortgages for long. According to number-crunching by MoneySupermarket, the average cost of a two-year fixed rate mortgage is now 4.15%, compared to 3.82% in October last year.
On a repayment mortgage of £150,000, this equates to an extra £27.31 a month.
If you are considering taking a new tracker mortgage, which follows the Bank of England base rate, any time soon, you will also pay more than you would have done just a few months ago. The average cost of a tracker now stands at 3.63%, according to our figures, compared to 3.37% back in August last year. This slaps a further £20.91 on the monthly cost of the same £150,000 mortgage.
TOP TIP! Find out what difference a mortgage rate increase would mean for you with the MoneySupermarket mortgage calculator.
Take action now!
If your budget simply can’t withstand a hike in mortgage rates, now is the time to take action. So where do you start?
Consider moving off your SVR: As we have already explored, if you are paying your lender’s SVR, it’s important to be aware that this rate can go up at any time, regardless of what’s happening to interest rates generally. Even the average SVR is now priced at 4.12% according to Bank of England figures, and many lenders will charge considerably more than this.
Nottingham Building Society’s Variable Mortgage Rate (VMR) equivalent for example, is currently priced at 6.14%. In any case though, there is a fair chance your SVR will go up and a remote chance it will go down.
One good thing about paying your lender’s SVR however, is that you are free to leave the deal at any time without being charged a penalty. So have a look around to see what better deals are out there. For example, if you have a 40% deposit, you could fix in for two years with HSBC at a rate of just 2.54%, although you will have to fork out £1,999 in fees.
Clare Francis, site editor at MoneySupermarket, said: “Mortgage rates are nudging upwards so anyone looking for a mortgage or whose mortgage deal will end in the next few months should act sooner rather than later to secure one of the current rates in case they rise further.”
Bear in mind also that mortgages can take around six weeks to complete so you will need to think ahead if you are planning on switching.
TOP TIP! Before you apply for a mortgage, order a copy of your credit report at MoneySupermarket’s credit reporting channel.
Check your SVR status first: However, it might be the case that you are all too happy to stick with your SVR. Some lucky customers with Cheltenham & Gloucester (C&G) and Nationwide building society will have reverted onto their SVRs at a time when both lenders offered the same guarantee that the rate would never exceed 2% above base rate.
While this was a short-sighted pledge in hindsight, given the run of historically low interest rates, these lenders have no option but to honour their promises – which leaves these customers still paying SVRs of just 2.50%. Unsurprisingly, both C&G and Nationwide have introduced higher SVRs for new customers.
Always shop around: If you are on a mortgage deal that is approaching expiry, your lender is bound to contact you with various offers to make you stay. But make sure you shop around to see what’s out there before accepting. It costs nothing to browse the fixed, tracker and discount rates available on our mortgage channel and you could save yourself hundreds of pounds a year.
TOP TIP! Remember that if you have a repayment mortgage and have not reborrowed against your home, you would have reduced the capital debt since the last time you remortgaged. Your house may well have risen in value too. This will translate into a bigger deposit which opens the floodgates to more deals and cheaper rates.
Don’t jump from the frying pan into the fire: When you are looking for a new mortgage, choose the type of loan wisely. Discount deals are linked to the lender’s SVR anyway so can still go up at any time. But, as it says on the tin, a base rate tracker must follow the base rate, which is not likely to rise anytime soon, according to Clare Francis.
She said: “Economists are expecting base rate to remain at 0.50% for the foreseeable future which means a lot of people may be happy to opt for a variable rate mortgage. As tracker mortgages are directly linked to base rate, these deals are a safer option.”
However, Clare Francis adds that, interest rate aside, if you need a set monthly budget, a fixed rate deal is the only way to go. “If the prospect of higher mortgage repayments worries you, a fixed rate deal will give you peace of mind and protect you from interest rate increases for a set period of time.”
Whatever you decide to do, now is the time to act before mortgage rates continue on their likely path upwards.
If you need more help and advice on your mortgage, call our mortgage partner, London & Country for fee-free independent advice on 0844 209 8725. Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.