Prepare for mortgage rates of 8%

I wrote an article that appeared on the front page of the Money section last Sunday which warned that if interest rates hit 6%, which an increasing number of economists believe will happen, borrowers on their lender's standard variable (SVR) will be paying interest of around 8% - the highest level for nearly a decade.

Thankfully only around 2.5million of the 11million households with mortgages are paying SVR as most are on cheaper fixed or discounted deals. However, 2.5million is still a significant number, and if you are one of these people you should really be looking to remortgage.

It used to be the case that everyone paid SVR, but competition in the mortgage market has changed that and lenders all now offer cheaper deals to attract new business.

Most people now remortgage every few years, once their current deal has come to an end, even if their loan is over a 25-year term. But there is a significant minority who either don't realise they can switch, don't think it is worth it, or simply never get around to it.

However, for most, remortgaging will be worthwile and will mean borrowers slash their monthly payments, often by hundreds of pounds.

Following this month's interest rate rise, the typical SVR is 7.5% - 2 percentage points above the 5.5% Bank rate. Some lender's charge even more. Bank of Scotland's SVR is now 7.85%, yet you can fix for two years at 5.34% with Abbey and Halifax. Someone with a £150,000 interest-only mortgage would see their monthly payments fall from £981.25 to £667.50 - a saving of £3,765 a year.

Fees associated with mortgages have been rising - the arrangement fee charged by both Halifax and Abbey of the 5.34% fix is £999 - and some people believe the fees outweigh the benefit. I spoke to a lady the other week who was really worried about being able to afford her mortgage now interest rates had risen again. She is currently paying SVR and thought it was the best option for her because she'd heard mortgage fees had been rising and didn't think remortgaging was worthwhile any longer.

However, a number of deals, including the Halifax and Abbey two-year fixed rates - are geared at those remortgaging. Such products include a free valuation and free legal work, thus keeping the upfront costs down and the arrangement fee can be added to the loan. Other deals have no fees whatsoever which means there is nothing to pay upfront. However, with no-fee loans you will probably pay a slightly higher rate, although over the fixed or discounted term it may not actually work out any more expensive. I put the lady I spoke to in touch with a broker and she'll hopefully find that she can cut her monthly outgoings by hundreds of pounds, signficantly easing the pressure of rising interest rates.

For most people therefore, remortgaging is well worth doing. The only borrowers for whom it may be better to stay on SVR is if you face penalties for switching. Some deals offer a low initial rate but then tie you into the SVR once the introductory period is over. A broker will be able to work out whether it is worth paying the penalty to get off  the SVR - it will depend on the savings that you can make by remortgaging.

If you have nearly paid off your mortgage, it may also not be worth switching - in this scenario it will depend on the size of the outstanding debt. Again, a broker can help you do the sums.

However, for everyone else on SVR, remortgaging almost certainly makes sense. And with further interest rate hikes expected, now is the time to make that phone call and apply for a new loan. Don't put it off any longer.

Comments

[Jez Sims]

I believe it is clear. Start pullling in the purse strings and paying off any mortgage debt as quickly as possible. Use brokers to re-mortgage and reduce monthly repayments and use the savings to pay off the capital. Mortgage freedom is one of the best feelings ever!!

[Morris Smith]

An arrangement fee of £1,000 on a mortgage of £100,000 adds an extra burden and at the end of two years when you remortgage you will still owe £950.