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Over 1.5 million people will come to the end of their fixed mortgage rates within the next 12 months. Since August 2006 the Bank of England base rate has increased from 4.50 per cent to its current level of 5.50 per cent. This means that you could see a big jump in your monthly repayments. In fact if you fixed your mortgage 5 years ago rates, were at an even lower level of 3.50 per cent in 2003.
But don't panic, there is plenty you can do to mitigate the increase in payments and if Bank Base Rate continues to decline as many commentators predict then next year may prove a pretty good time to fix your rate again. This week we look at what you should be doing as you approach the end of your fixed rate;
What is your existing lender offering?
Your lender will usually write to you as the end of your fixed rate approaches telling you what your new repayment will be. They will often also provide you with a list of alternatives such as fixed, variable and tracker rates they can offer you. Once you are armed with this information you can then start to decide on the best course of action.
Fixed, tracker, variable or discounted rates?
You need to decide at an early stage what type of deal you prefer. Your choice here will depend on a couple of factors. First, what do you think will happen to interest rates in the near future – will they continue to fall, stay the same or start to rise again? No one has a crystal ball so all you can really do is read what the commentators are writing and take an educated guess. Secondly you need to decide how comfortable you are with gambling on future interest rate changes. If you are really maxed out on your mortgage and other credit then ask yourself if you can really afford to gamble on future rate changes. If not a fixed rate is for you. A tracker product means that your mortgage rate will follow any changes in bank base rates and a discounted rate means you will receive a discount from the lenders standard variable rate (SVR) for a period of time. However, beware because nearly all fixed, discounted and tracker products will carry up front fees and will also tie you in for a period of time, so if rates go the wrong way and you haven't fixed the rate you could find yourself with ever increasing repayments.
Shop around
Once you know what your existing lender has to offer and have decided on the type of deal it's time to shop around. It's very unusual for your existing lender to offer you the most competitive deal in the marketplace. They know that moving your mortgage will probably incur costs and some time and effort and for this reason they know they can usually retain most borrowers if they offer something which is remotely attractive. That's why it's crucial for you to shop around. You can compare products online or alternatively talk to a mortgage broker or IFA who will be able to tell you if they can beat the deal you've been offered. But don't get carried away and remember there are usually costs associated with moving your mortgage. You will need to instruct solicitors, your new lender will usually charge you a valuation fee and arrangement fee (which can be hefty) and if you use a mortgage broker or IFA they may also charge you (not all charge a fee so ask this question up front). However, even taking all the fees into account you can often save money over the term of the new deal. There are even deals around that will pay all or some of these fees for you (known as fee-free deals) although they don't usually offer the best rates.
What if I can't move lenders?
Not everyone will find it cost effective to move lenders and some may find it impossible under any circumstances. This may prove the case if you have a very high loan in relation to the property value or if you have experienced arrears or other problems with credit. Since the 'credit crunch' many lenders have tightened up their lending criteria which will mean that more and more people will find their access to credit severely curtailed.
However, all is not lost, even if you have to stay with your existing lender there may be a couple of options that will help you to reduce your monthly repayments;
- Extend your mortgage term. This only works if you have a capital and interest (repayment) mortgage. If you do then most lenders will allow you to extend the mortgage term to 35 or even 40 years. For example, on a £100,000 mortgage at 5 per cent increasing the term from 20 years to 40 years will reduce the monthly repayments from £668 to £485. Whilst it's not ideal to have a 40 year mortgage it is a short term fix which could get you out of difficulty until things improve. However, always remember to change the term back as soon as you can afford to.
- Transfer to an interest only mortgage. Again in times of difficulty most lenders will allow you to pay just the interest for a period of time until you get back on your feet. The difference this can make is quite significant. On the same £100,000 mortgage at 5% the interest only payments reduce to £416, a saving of £252 per month.
- Check other costs to see if there are savings to be made. If all else fails then a review of all your costs could reveal some savings. Review things like life insurance, payment protection insurance, buildings and contents insurance and shop around for alternative quotes. A little bit of time could result in some significant savings.
If you're still struggling
If you're still struggling to meet your repayments then it's important to talk to your lender at the earliest stage. Most lenders will do what they can to help provided you keep them informed and pay what you can. However, if your problems are more severe then there are organisations such as Citizens Advice or the Consumer Credit Counselling Service who can help you and may be able to liaise with the lender on your behalf. The important point is to engage them at the earliest possible stage.
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