December 8th, 2016
It should now be common knowledge for anyone looking to secure a mortgage in the UK that interest rates have continued to tumble in recent months, continuing an ongoing period of borrowing costs sitting at the lowest level seen in the UK markets. As such, it is fair to say that there has probably never been a better time to secure a new interest rate for your mortgage debt.
What does then become the prominent question to consider is whether now would be the time to take the leap to fixing for a longer term, to take advantage of the crop of historically low fixed rates that are available. HSBC have been prominent in the UK market as one of the market leaders for slashing interest rates, but the lender chose to announce yesterday that they would be removing their market-leading 0.99 per cent 2-year fixed rate. The general reaction to such an event is often a shift from competitors to re-price their own rates upwards to avoid becoming inundated with a swath of applications.
Given that this is one of the first major moves by a lender to increase interest rates in recent times, borrowers may be wondering if the wind of change is imminent. While this could simply be a move by the lender to temper the flow of business, it should act as a warning that those great bargains don’t hang around for ever.
Over the course of 2016 UK lenders have aimed some of the largest reductions to interest rates on the 5 and 10-year fixed range. Locking a mortgage into a longer-term rate has never been more appealing. Presently, Virgin Money offer a 1.83 per cent 5-year fixed option with a 40 per cent deposit and Coventry Building Society share the top of the 10-year fixed interest rate table with HSBC, offering a 2.49 per cent rate if a 40 per cent deposit can be provided.
Such low levels are surely tempting and there are many benefits to jumping onto one of these options. As MP’s chose to agree to the Government’s plan to trigger Article 50 in yesterday’s parliamentary session, fresh levels of uncertainty around the fate of the UK economy will be rife. While it would be an extreme decision for the Bank of England to hike rates by more than 2-3 per cent, the chances of a rate rise in the near-future appear to be more likely than ever.
Comparing the 2.49 per cent 10-year fixed to the current range of standard variable rates on offer from lenders should provide sufficient impetus to consider these longer-term options, as the current average SVR sits around 3.70 per cent. Once an initial interest rate expires, a lender will automatically move a borrower onto their in-house SVR. These rates tend to be far higher than the lenders headline interest rates, as they price the offering at a higher level, to offset the costs in purchasing competitive rates on the money markets.
While there is no requirement to take the SVR, as a borrower can consider taking another reduced product from their current lender, or choose to re-mortgage to a new lender, the recent tightening of mortgage application criteria could raise the chances that the only option is to stay put. Bearing in mind that the Bank of England is likely to raise the Bank Base Rate at some stage soon, this will mean that lenders are likely to raise their own SVR to cover the costs of maintaining a strong market presence.
For anyone that has recently investigated a re-mortgage to move their debt from their current lender, to a mortgage with a more attractive competitor, the cost involved to make that switch will be fresh in the memory. The most competitive mortgage rates available currently come with an arrangement fee that sits around £999-1499. If you consider that taking a competitive 2-year fixed means that a further fee will be payable each time you move product, paying this once for a 5 or 10-year option could work out to be cost-effective in comparison.
Despite the attractiveness of these offerings, there are negatives to be considered in taking such long-term arrangements. Firstly, any fixed rate mortgage will be underpinned by an early repayment charge. Mortgage lenders will choose to offer low rates to entice their clients, but these are always tempered with prohibitive exit penalties, if the borrower chooses to end the arrangement early. At present the majority of longer term fixed rates come with penalties that reduce on a sliding scale, usually starting at a premium of 5 per cent of the current mortgage balance being payable, if the borrower chooses to exit the mortgage rate. As an example, a mortgage of £250,000 would raise and ERC of £12,500 to be paid.
These penalties usually reduce in the latter years of the arrangement, dropping down to 1-2 per cent in the final years of the deal. However, some lenders impose the 5 per cent charge for the full-term of the tie-in, so borrowers should be particularly careful when checking a potential mortgage.
So, what happens if a borrower tied into a long-term mortgage wants to move home? Most UK lenders offer the option to move the mortgage over to a new property, keeping the current terms intact and providing the option to borrow additional required funds at a different rate, if the applicant wants to purchase a property at a higher value. This process is known in the industry as Porting.
What should be noted as a warning to anyone considering this as a get-out-of-jail-free card is that the lender will run a new mortgage application on the prospective home mover, meaning that the finances and income will once again be scrutinised. If any detrimental changes are evident, the lender can refuse to agree the move, so changes to credit or employment can all have an impact. It’s likely that another lender may be able to assist with the application, but due to the ERC to be paid, this may also not be a possibility.
The factor that should also be considered when choosing a longer-term rate, is whether interest rates will even raise at all over the next couple of years’. Many economists view the UK’s plan to exit the EU as a sign that lending rates need to increase. Savers will likely be on praying for this to happen. But this is not a cast-iron guarantee, so what does that mean for borrowers?
While the costs to switch product on a regular 2-year cycle don’t benefit every borrower, those with larger mortgage balances can improve their position by following this route. Virgin Money currently offer a 2-year fixed rate of 1.24% for a re-mortgage with a 40 per cent deposit. Taking a loan of £500,000 over a 20-year term on a capital repayment mortgage, this would cost £2353.40 per month over the next 2 years. When compared on the same basis, but using the Virgin Money 1.83 per cent 5-year fixed rate, the monthly cost is £2489.36.
That monthly difference of £135.96 adds up to £3263.04 over the first two years of the mortgage. Once the £995 arrangement fee is deducted, the saving made between the two options is £2268.04 over the period.
Certainly, that level of saving is going to attract interest. Whether the risk of potentially losing out on a long-term arrangement at a low level of pricing must be weighed against that benefit. It’s a case of what is best for each individual borrower’s requirements and much of the decision weighs on one’s opinion of the potential for interest rate rises over the short term. No one person has the answer, so it’s essential that borrowers consider the plus and minus points of this decision.
All rates and other data quoted correct at date of publication.
Article by: Simon Butler, Associate Director at Contractor Mortgages Made Easy
Media Contact: Sarah Middleton, Public Relations Manager
Tel: 01489 555 080