The warning that interest rates are likely to rise quickly has left almost four million mortgage holders facing more than £1 billion in extra payments — but has also raised the hopes of savers.
The Bank of England’s monetary policy committee signalled that the base rate will have risen to 1.2 per cent by the start of 2021. The next 0.25 percentage point rise, taking it up to 0.75 per cent, is expected to come in May. Lendy, the peer-to-peer lender, says that May’s projected rise will cost the 3.7 million borrowers who are not on a fixed-rate mortgage deal an extra £1.3 billion over a year.
Here’s what you should do.
Switch to a long-term fixed mortgage now
“Many of the lenders raised their rates just before the last base-rate hike and the same thing will probably happen again,” says Aaron Strutt from Trinity Financial, a mortgage broker. “If you are on an expensive standard variable rate, you should ask your lender for a better deal.”
Statistics from LMS, a conveyancing company, suggest that five-year fixed- rate deals are the top choice for remortgaging, but that two-year fixes are growing in popularity. Five-year fixes accounted for 43 per cent of remortgages in November (down from 50 per cent in October), while two-year fixed rate remortgages went up from 20 per cent to 23 per cent, their highest level since March.
With rates set to rise, however, Ray Boulger from John Charcol, the broker, says borrowers should consider longer fixed-term deals. “For many it will make sense to fix for five, or even ten years. However, some ten-year fixes have onerous early repayment charges for the whole ten years,” he says.
Even if you are on a fixed rate that is due to end after May you may still be able to change deals because most lenders allow you to lock in a new rate three months before your deal ends.
Building society rates are better
The average interest rate on five-year fixed mortgages from building societies is 0.41 per cent lower than the average from the main banks. Rates for those with only a 10 per cent deposit are also appealing. “The average building society five-year fixed rate at 90 per cent loan-to-value [LTV] is 0.72 per cent lower than those offered by the banks,” says Charlotte Nelson of Moneyfacts, a data company. “This represents a saving of £76.30 a month paying 2.94 per cent instead of 3.66 per cent.”
Leeds Building Society is offering a market-leading two-year fix at 1.19 per cent at an LTV of 60 per cent. With an LTV of 65 per cent you can get 1.2 per cent from Principality Building Society and 1.24 per cent from Yorkshire Building Society, fixed for two years, or 1.65 per cent fixed for five years from Principality. HSBC has a five-year fix of 1.74 per cent and Metro Bank 1.74 per cent, both at an LTV of 60 per cent.
Short of time? Try a product transfer
Most banks and building societies allow you to switch deals with only a few clicks of a mouse using the product transfer system. Mr Strutt says a surge in such transfers recently suggests that canny borrowers are trying to pre-empt rate rises. L&G, the insurer, says the value of product transfers negotiated by mortgage brokers soared from £10 billion in 2016 to £25 billion in 2017 and it is predicted to be between £35 billion and £50 billion this year.
You can’t use the service if you want to change the conditions of your mortgage in any way, such as withdrawing equity, removing a partner, or borrowing more money.
Savers, don’t get your hopes up
When the Bank raised the base rate in November, only a minority of banks and building societies passed on the full 0.25 percentage point increase.
Crucially, however, the Funding for Lending scheme (the government scheme that lent banks and building societies tens of billions of pounds cheaply) ended last week, turning off the flow of cheap finance, meaning that banks may become interested in wooing savers to raise capital.
Swap rates (the rates at which banks borrow from one another) have also gone up, which may work in savers’ favour, says Andrew Hagger from Moneycomms, the consumer website.
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, says savers should not wait for rates to go up before picking a fixed rate. “If you fix for a year you can get 1.95 per cent, while the average easy-access rate is 0.48 per cent,” she says.
Between January and December last year the amount of money in fixed-rate accounts fell 5.7 per cent to £209 billion, according to UK Finance, the trade association. There is £636 billion lying in high street easy-access accounts.
Challenger banks have upped their game, offering four out of the ten best easy-access rates, according to Moneyfacts. The best rate, without an introductory bonus, is RCI Bank’s Freedom Savings 1.3 per cent, with a minimum saving of £100. The best fixed rate is 2.5 per cent from PCF Bank for anyone happy to put away at least £1,000 for seven years (minimum £1,000).
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Credit: The Times