What mortgage should I go for?

Homeowners on variable rate mortgages are set to enjoy another month of low interest rates in February – but the party could soon be over, so review your mortgage now...

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The decision by the Bank of England’s Monetary Policy Committee (MPC) to hold the base rate at 0.5% in February for the 23rd consecutive month might prompt a sigh of relief for the nation’s borrowers – but this is likely to be short-lived.

Interest rate rises loom larger

Pressure on the MPC to hike interest rates is mounting as inflation soars. The Consumer Prices Index (CPI) is now standing way above the government’s 2% target, at 3.7%. This has already prompted a second member of the MPC to vote for a 0.25% rise in January and, with more of the nine expected to join them in the coming months, some experts are forecasting rate rises as early as May this year.

Kevin Mountford, head of banking at moneysupermarket.com, said that even the prospect of interest rate rises is already causing a stir in the mortgage market. “We have seen a raft of lenders in recent weeks pulling deals and changing rates. Swap rates, on which fixed rate mortgages are priced, have already risen in anticipation of base rate rises. This means that borrowers who want to lock in the cost of their mortgage deal will now pay more for the privilege – especially if they can only lay their hands on a small deposit.”

Deposits are shrinking too for current homeowners who want to move up the ladder, as the property market remains stubbornly flat. The value of an average property in January slipped by 0.1% according to Nationwide Building Society, while 19% of people looking to buy their second home are unable due to a lack of equity, according to a separate report published by Lloyds TSB.

What to do with your mortgage...

With interest rate rises looming large, government spending cuts and tax hikes on the horizon, the priority for homeowners will be to ensure their mortgage remains affordable – and this means getting on the best deal.

Kevin Mountford said:  “If you are on a variable rate mortgage, such as a tracker deal or even your lender’s standard variable rate (SVR), and are worried that your budget will not absorb a rise in interest rates, you will have to switch to a fixed rate now. This might seem like a financial blow initially but when – rather than if – interest rates start to climb, you could be left feeling very relieved that your monthly mortgage payment is not following.”

For example, if you have a repayment mortgage of £200,000 on which you are currently paying a rate of 2% over base (2.5%), your monthly remortgage payment would today cost just under £900 a month.

If base rate rose by even a modest 1% over the year, leaving you paying a rate of 3.5% on the same debt, then by December your monthly mortgage payment would cost more than £100 extra – and further potential rises could be lying in store. If this sounds unaffordable, you will need to consider a fixed rate now.

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The best fixed deals

The best fixed rate deals will depend on the level of deposit you have; as ever, the more you can put down, the cheaper the rate you will get. If you are in the fortunate position of being able to find 40% of the property value, Santander is offering a rate of 2.65% fixed for two years, though this does come with a hefty arrangement fee of £1,995.

Borrowers with a 15% deposit looking to shelter from forthcoming rate rises for the next two years, will find the cheapest deal from Principality Building Society, priced at 3.99% with a lower £999 fee.

If you can only lay your hands on a 10% deposit, Newcastle Building Society is offering the best two-year fix pegged at 5.15% with an £894 fee.

A five-year strategy

There is also the option of fixing your rate in for longer than two years, though bear in mind this will come with early repayment charges to match. If you have access to a whacking 50% of the property value, NatWest is offering a rate of 3.95% for five years with an initial low fee of £699 – a deal that could leave you feeling quite smug by 2016.

For those with a more realistic 15% deposit, Leeds Building Society is offering a rate of 4.69% for the next five years, with a £999 fee, while the best deal for those with the minimum 10% deposit comes from Coventry Building Society priced at 5.69% with a small fee of £199 – though this is only available through an intermediary.

The best variable rate deals

If your budget is a little more flexible, variable rate deals – which tend to start off cheaper – could fit the bill. Again, the very cheapest are reserved for those with the most cash to put down upfront.

First Direct is offering a tracker priced at just 1.99% for the next two years in return for a 35% deposit and £999 fee.  This is 0.66% cheaper than the best equivalent two-year fix but of course, comes with the gamble that rates may increase by a lot more than this amount.

For a 40% deposit, First Direct’s sister bank, HSBC has a lifetime tracker priced at 2.29% which comes with a rock bottom £99 arrangement fee and no early repayment charges. This means you can jump from the deal cost-free if the rate becomes unaffordable.

For those with just a 10% deposit, variable deals are more limited – and more expensive. Hinckley and Rugby Building Society is offering a lifetime discount deal currently payable at 4.64%. The fee is £1,090 and – while your rate is likely to go up in line with the lender’s SVR – there are no early repayment charges.

A final word...

Simply upping and switching your existing mortgage may not be as easy as you would like. If you are tied into an existing deal, it’s likely you will need to fork out early repayment charges to leave. If these are very hefty – for example, they are priced on a percentage of a large mortgage balance – switching could prove a false economy. On the other hand, it may be something you have to swallow for the sake of future affordability.

This can get complicated so, if you need help with the number-crunching, make an appointment to see an independent financial adviser or mortgage broker. Confused about which mortgage to go for? Speak to a qualified adviser.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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