Homeowners are currently benefitting from record low interest rates. This is a result of a number of factors, including greater competition in the market, strengthening confidence in the economy, and the Bank of England’s base rate being held at an all-time low.
Many seasoned players in the mortgage market may remember watching for the interest rate announcement every month to get an idea of whether or not their next mortgage payment would go up or down. But with the rate being held at 0.5 per cent for over six years, when it does go up, this will be a novel phenomenon for millions of people who have become homeowners since 2009, and have never experienced a rate rise.
A lack of movement in the base rate will have lulled many into a false sense of security. It’s crucial that people review their finances sooner rather than later to ensure that they are prepared for when their monthly repayments do go up. There’s no better time to do this than now, as the highly competitive market conditions have meant that lenders are offering extremely low rates by thinning their profit margins.
Rates are therefore unlikely to fall any further, which means that it is a prime opportunity for borrowers to make the most of the products currently available, and potentially save themselves thousands of pounds a year. People shop around to get the best deal on car insurance, broadband, and the like – why shouldn’t the same attitude be applied to mortgages?
WHAT TYPE OF MORTGAGE HOLDER ARE YOU?
Our research illustrates how your attitude to remortgaging could impact your finances over the next few years, based on the average UK house price and a 75 per cent loan-to-value loan. Here are the four types of mortgage holders we’ve identified – and how their actions impact what they save.
1. The stuck in the mud
Despite media speculation on a potential rate rise, this borrower decides to remain on their lender’s standard variable rate (SVR). They are currently able to afford their current monthly mortgage payment of £567.06 and do not expect rates to rise significantly over the next year or so. By never reviewing their rate, they will pay an extra £63.71 per month every time the SVR increases by 0.5 per cent.
2. The autumn switcher
This borrower decides to review their finances, following speculation that rates will rise at some point in the next year. They are currently on their lender’s SVR of 4.45 per cent and, to help them find another deal, they ask a mortgage broker for guidance. They decide to opt for a two year fix from the Halifax. This has a rate of 1.74 per cent and has a fee of £999. This reduces their monthly interest payments to £223.17 – a saving of £343.89 per month, or £8,253.36 over the term of the mortgage.
3. The base rate tracker
This borrower took out a tracker mortgage within the last five years. Since taking out the mortgage, they have had a pay rise, so they feel able to cope with a small increase in their monthly payments and decide to wait until the base rate rises to change their deal. Currently, they are paying £317.30 per month (0.5 per cent plus 2.49 per cent).
If the base rate increases by 0.5 per cent, their interest payments would increase to £381.01, and if interest rates reach 1 per cent, they would pay £444.72 per month. This would cost them £127.42 per month more than someone else with the same circumstances that chose to switch to a two-year fixed rate deal now.
4. The one who waits too long
Currently on an SVR from their lender, this borrower waits until summer 2016 before deciding to shop around. By now, banks are pricing in higher rates, so while they save money by moving off a SVR, they do not save as much as those who remortgaged earlier.
Based on the assumption that the base rate has increased by 0.5 per cent by early 2016, this borrower would only reduce their monthly payments by £279.76 and would save £6,714.24 over the term of the mortgage.
Clearly, time is of the essence if you are to maximise the amount you could save. We would urge anyone who is currently on their lender’s SVR or coming to the end of a mortgage term to speak to an adviser about considering another deal. With the potential to save thousands of pounds a year on the average UK mortgage payment, now really is the time to look around and secure a great deal. Most people wouldn’t hesitate to accept a pay rise from their employer, so why hesitate in giving one to yourself by choosing a more competitive mortgage rate?