Thousands of mortgage borrowers should check the end date of their fixed rate deals now to avoid a hefty ‘payment shock’ when the offers expire.
Anyone who fails to switch to a new deal in time is likely to see their monthly bills rise by at least a hundred pounds while they scramble to sign up to an alternative deal. Worst hit will be those who took out hugely popular two-year fixes in late 2013 or early 2014.
Researchers at financial product scrutineer Moneyfacts say borrowers who had 25 per cent deposits – or 25 per cent equity – in their homes back then will have been paying an average of just 3.06 per cent interest for the length of their deal.
Organised: Eleanor and James Tucker found a new loan before their fixed deal expired
Borrowers who fail to sign up to a better, alternative deal before these deals end will be automatically moved on to their lender’s standard variable rate. These so-called SVRs vary widely and many of them rose last year, even though the Bank of England base rate has been held steady at a record low of 0.5 per cent since 2009.
The average standard variable rate charged by all mortgage lenders is 4.82 per cent, though some leading building societies such as Skipton and Yorkshire charge more while some SVRs top 6 per cent.
If you do not prepare for the end of your current deal and a typical £110,000 repayment mortgage bounces from an average two-year rate to the average standard rate, your payments will go up by £110 a month or £1,320 a year.
Worse still, your future finances will be under greater risk the longer you delay switching to a better rate.
‘Broker found us a new loan in good time’
Good mortgage advice helped Eleanor and James Tucker get ahead of the game and avoid a payment shock when their existing two-year fixed rate mortgage expires this spring.
Eleanor, a 32-year-old finance worker for the National Health Service, says: ‘We had gone to broker London & Country Mortgages previously to get a good mortgage deal and it got in touch with us last December to say it could help us find a replacement loan. It also said the new loan could be set up so we could move straight on to it when we needed to.’
The Tucker family home in Torquay, South Devon
Bath-based London & Country found the couple a best-buy five-year fixed rate loan from TSB set at 2.79 per cent for their three bedroom semi-detached house in Torquay, Devon.
Sorting everything out in advance allowed the family to take their time and improve their finances. They asked the broker about reducing the term of their new mortgage so it gets paid off sooner. Eleanor says: ‘By reducing the loan term, we increased our monthly payments a bit but as we are going on to a good loan rate it is manageable and will save us money in the long run.’
With their new mortgage set up in advance the couple, who have two children Lily, seven and four-year-old Sam, say they feel comfortable about their financial future.
Lenders frequently boost profits by increasing standard rates even if base rate stays the same – as several did last year. In the past, when base rate has gone up by, say, 0.25 percentage points, many lenders have profited by raising their rates by 0.3 percentage points or more.
Charlotte Nelson, senior researcher at Moneyfacts, says: ‘Fortunately, you can avoid the pain of a standard variable rate mortgage by switching on to a better rate before you get moved on to the SVR. There is stiff competition among lenders to offer the lowest rates for people looking to remortgage, so this is a good time to find a new deal while escaping the clutches of an expensive SVR.’
Best advice is to approach your lender about better rates two to three months before your current deal ends – and not to ignore any communications from your lender around this time. Lenders should contact you before your current deal ends, but many customers dismiss letters or emails as junk.
Having got an offer from your lender, compare it with rival deals using best-buy charts including those in the ‘mortgages and homes’ section on our sister website This is Money.
Most lenders let you sign up to and hold a new deal up to six months before you want your mortgage to transfer on to it. Just include the end date of your current deal on the form and your loan will be transferred the following day. Better still, plenty of lenders will offer low or no fee remortgage deals to try to win customers from their rivals. Most will pay your legal and valuation costs as well.
If your property value has gone up in recent years, at the same time as your mortgage debt has fallen, then you should qualify for some of the best loan rates around.
If you want a two-year fixed rate loan and your mortgage is worth no more than 70 per cent of your home’s value, broker London & Country says you should look to deals from building societies Chelsea, Leeds and Nationwide as well as banks Clydesdale, Santander or Woolwich.
If you want a five-year fixed rate deal, the best offers are available from building societies Coventry and Skipton and banks First Direct, Tesco, TSB and Woolwich.
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