Should you switch mortgage now to avoid a rate increase?
10th April 2018
You may have seen some excitable chatter in the press lately about a potential base rate rise, and what that might mean for mortgage holders.
Almost every month, a team within the Bank of England (the Monetary Policy Committee, or ‘MPC’) gets together to set the bank base rate. The base rate is important as it plays a role in what sort of interest rate you’ll be charged by your mortgage lender and what return you can get from your savings.
We don’t know for sure, but it’s a bit of an open secret that the MPC is planning a rise. The Bank’s governor, Mark Carney, has been dropping hints for a fair while now that the base rate will need to increase sooner or later, and it’s now looking likely that that will happen on 10th May, exactly one month from now.
In fact, a poll of 57 economists by Reuters found that 32 of them are expecting a rise next month.
The base rate was cut to a new record low of 0.25% back in 2016 following the shock of the Brexit vote, but the improving state of the economy led to a rise in November 2017 to 0.50%. The expectation now is that there will be at least one, and perhaps even two, further rises taking place this year.
Have a variable rate mortgage?
A base rate rise is a really important thing for all mortgage holders to consider, no matter what sort of deal they have. But let’s start with variable mortgages, which come in two main forms:
Tracker mortgages have interest rates that are directly tied into the base rate, so if it goes up - say by 0.25% - your mortgage interest rate will increase by the same amount.
Standard Variable Rate (SVR) mortgages are what you move onto when you finish your initial fixed or tracker period on your mortgage. You’ll probably see your rate increase by a similar amount to the base rate, but your lender has the ability to increase (or decrease) their ‘SVR’ as much or as little as they like.
Let’s look at an example for each scenario…
Say you’re on a tracker mortgage with an interest rate of ‘2.00% plus the base rate’. Since the base rate is 0.50%, you’ll therefore have an interest rate of 2.50%.
On a £150,000 mortgage on a 25-year term, your monthly repayments would be around £673.
But if the base rate goes up by 0.25%, so too will your interest rate, bumping up your repayments to £692. Over the twelve months of the year, that would total an additional £228.
Borrowers on an SVR are in an even more compelling position when it comes to switching.
We’ve calculated that there are around two million people on their lender’s SVR at the moment, paying an average of nearly £4,900 a year more than they need to just on interest. That’s £388 a month!
If their lender were to increase their SVR, the amount would increase even further.
The fact is that when base rate goes up, the rate of interest you pay on a tracker mortgage or on an SVR will go up too, so you’ll quickly feel the effects.
Have a fixed rate mortgage?
If you’re on a fixed rate deal, then you might think that a base rate rise is nothing to worry about; your repayments are locked in place for a set period, after all. As a result, even though the base rate is going up, the interest rate on your current deal will not change.
That’s true for your current deal, but it will make an impact on your next mortgage:
When the base rate goes up, lenders usually re-price their fixed rate deals too. That means your next mortgage deal may be about to get more expensive.
The base rate is already very low by historical standards, and that’s led to some record low fixed rate deals; they won’t be around for long if the base rate rises.
Two big reasons to switch
Cheaper repayments - moving to a new deal before base rate goes up could secure you a cheaper monthly mortgage bill.
Security - you can lock into that cheaper rate for a lengthy period, perhaps even for as long as ten years.
A number of lenders have reported that longer fixed rate deals - those where you fix your rate for five years or more - have been growing in popularity in recent months.
If you want to secure a low rate, whether it’s for two years or ten, then you need to be thinking about it now.
Will there be a fee?
One important consideration before you opt to remortgage is whether you will have to pay any early repayment charges (ERC).
Let’s say you have a two-year fixed rate mortgage. Generally, if you opt to remortgage to another deal during those two years, you’ll have to pay an ERC. This is usually calculated as a percentage of your outstanding mortgage: on a four-year fixed rate for example it might be 4% in the first year, falling to 3% in the second year and so on.
As a result, the ERC can work out as being a significant sum depending on the size of your home loan and how early into your fixed rate you want to switch.
For example, if you want to move a £200,000 mortgage and have to pay a 4% fee, you’ll need to part with £8,000. But if the fee is only 1%, it’s a more palatable £2,000.
What you need to know about the SVR:
Once you’re outside the initial fixed or tracker period, you shouldn’t have to pay an SVR.
Some lenders let you lock into a new deal months before the switch takes place, meaning you avoid the SVR.
Even if switching immediately will involve paying an ERC, it’s worth working out how much that would be as moving now may secure you a big enough saving on your future rate that it’s still worth doing.
How easy is switching?
If you choose to switch, the next question is to decide which mortgage deal you want to go for.
With thousands of different mortgages currently available, it can be a bit overwhelming to work out which one is best for you and your circumstances.
That’s where an online mortgage broker can help. Free and simple to use, they can speedily look at your circumstances to help find the mortgage deal that best meets your needs. What’s more, they’ll have access to some lenders and mortgage deals that you can’t get by going to a lender directly.
Now you can focus on working out what to do with that money you’re saving on your repayments every month.
This article was written by award-winning personal finance journalist John Fitzsimons, whose work has been published by the likes of The Sunday Times, The Mirror, Forbes, and loveMONEY.