Considering Switching Mortages?
Switching Mortgages
It’s been a great year for variable rate borrowers. How lovely to come to the end of a short-term deal (perhaps a fix) only to find that you would revert automatically to a SVR that was probably lower than you had been paying. Indeed it was probably lower than you could move to even if you went through the cost and hassle of remortgaging. You could do nothing, and save money.
But all good times must come to an end and you need to wake up and smell the coffee. It’s time to remortgage – and quickly.
Reason One – Rising SVRs
The Bank of England Base Rate has been at its record low of 0.5% since March 2009, and many SVRs have indeed been luxuriously low. However, not all have stayed at rock bottom prices.
In fact during the period that the Base Rate has remained steadfastly locked at 0.5%, lenders have begun edging up their SVRs.
First one or two did it – most notably Nationwide last April, which launched a new, higher SVR for new borrowers, because its old one had a price guarantee so good it was costing the lender too much. Then the rise in SVRs really began in earnest in the New Year, with a handful of lenders raising their rates. Skipton Building Society proved the most high profile to sock it to existing borrowers, breaking its price guarantee to hike its vanilla mortgage rate from 3.5% to 4.95%.
Some lenders have even started charging a whopping 12.55% on their SVR! If your lender has upped its SVR, you probably already realise it’s time to find a more competitive mortgage. If not, get out now before it does, because more are expected to raise their default mortgage rates this year.
Reason Two – Fixed rates won’t go lower
Another theme of 2010, and this time a very welcome one, is the cutting of fixed rates.
There are now plenty of two-year fixed mortgages on offer under 3.5% if you’ve got the necessary deposit, and even five-year fixes are now sub-5%. Many experts think that they might have bottomed out and it could be time to take advantage of locking into a low rate now.
One theory is that the uncertain political landscape makes investors jittery, markets wobbly and sends gilt yields skywards which, in turn, pushes up swap rates and therefore fixed rates.
It’s a complicated process but uncertainty over the UK’s massive budget deficit, and which party could be in power to tackle it, could mean fixed rates will rise later this year. And that’s aside from the obvious interest rate risk if you are on a variable deal.
Has there ever been a better time to lock in?
• Adopt this goal: Cut your mortgage costs and pay off your mortgage early
Reason Three – Switch and overpay
By switching to a home loan that allows you to overpay a greater amount without penalty, you could do yourself a massive mortgage favour. Overpaying is one of the best things you can do, as it reduces your debt and reduces the interest you will incur.
Cumulatively this process can save you thousands of pounds and years off your mortgage term.
Even if you only overpay for a year or two you will still shift your debt more quickly than you would otherwise. This will help to reduce your loan-to-value ratio, so when you come to remortgage again you can get an even more competitive deal. If your current lender is restrictive about how much you can overpay, move to one that is flexible.
An offset mortgage usually offers you unlimited overpayments, for example, and you can still get access to your money if you need it, as I explain in Homeowners: maximise your savings.
Reason Four – Funding gap will mean less choice
There is an enormous funding problem facing the UK mortgage market.
What’s new, you might ask? But in fact, despite lender funds being severely restricted by the credit crunch, the government stepped in to help out the industry to the tune of £300bn – things could have been a lot worse.
Now it’s payback time and the Council of Mortgage Lenders has already admitted that lenders won’t be able to meet current timescales to repay this support between 2011 and 2014. Plus it highlighted that the private sector will not be able to plug the gap left by the withdrawal of the Special Liquidity Scheme and Credit Guarantee Scheme.
In other words, lenders are going to find it tough to repay their massive debts and find the funds to lend us mortgages, unless they get a lot more help from whoever is in government after the election.
We might look back on 2010 as the year we were relatively swamped with great mortgage deals.
Reason Five – Save money
It sounds unlikely given many lenders’ low SVRs, but a combination of some of the default rates rising and new deals being cut means that many borrowers can actually save money by moving off SVR and onto a new tracker or fixed deal.
This is most true for those with a large deposit, as 60% and 75% LTV deals are priced very keenly at the moment and there are definite savings to be had. With sub-2% variable rates and fixes around the 3% mark, it could be that your lender’s SVR doesn’t look so cheap after all. So why not switch and save now?