Rising costs bring warning: Get a mortgage that's fixed or a tracker

Rising costs bring warning: Get a mortgage that's fixed or a tracker

By Jo Thornhill

PUBLISHED: 15:29 EST, 9 June 2012 | UPDATED: 04:35 EST, 10 June 2012

Millions of homebuyers who are paying variable mortgage rates are being urged to plan for rises.

Although the Bank of England base rate â€" currently at 0.5 per cent â€" is not expected to rise in the immediate future and might even fall, mortgage lenders are under intense funding pressures due to the crisis in the eurozone and increased regulation.

Many banks are responding by increasing their standard variable rates (SVRs) to grab extra profit.

Co-operative Bank, Royal Bank of Scotland, Halifax and Bank or Ireland have all increased their SVRs in the past few months.

Covered: Kelly Stephens, with son Ryan, is insured against a mortgage rate rise

Further increases are likely to result from credit downgrades that major lenders are expected to suffer in the near future.

These can make it more costly for lenders to obtain funds from other institutions. Higher costs would almost certainly be passed on to mortgage borrowers.

About two in five borrowers pay variable rates. Ray Boulger, senior technical manager at mortgage broker John Charcol in central London, says: ‘If you have at least 15 per cent equity in your property and you are paying a standard variable rate of 3.5 per cent or higher, you could save money by finding a cheaper fixed or tracker mortgage.’

Boulger says that although SVRs may rise, the Bank of England base rate will probably stay low for at least two more years. For this reason he says borrowers might want to opt for a low-cost tracker.

Most tracker mortgages will rise or fall exactly in line with the changes to the base rate. Some are linked to other interest rate measures, such as Libor, which is the rate paid between the banks.

Kelly Stephens has a Libor-linked loan (see more about her mortgage situation, below). So, unlike a standard variable rate, borrowers on trackers are not at the mercy of their lender over rate rises.

Borrowers who prefer absolute certainty should opt for a fixed deal where the rate is locked for a defined period of between two and five years, or sometimes even ten. There is a small premium to pay for the peace of mind, but many of the best deals are still cheaper than some SVRs.

A borrower with 15 per cent equity in their property could fix at 4.09 per cent for five years with Britannia, part of Co-operative Financial Services.

A homeowner with 20 per cent equity could get a lifetime tracker with a starting pay rate of 2.8 per cent with Bank of China.

So, for instance, a borrower with a £100,000 repayment mortgage paying Halifax’s Homeowner Variable Rate at 3.99 per cent could cut their monthly mortgage bill by more than £60 from £527.28 to £463.87 by switching to the Bank of China tracker.

With some remortgage deals the valuation and legal fees are free, so the only cost to the borrower will be the arrangement fee on the mortgage.

These can be steep â€" £999 in the case of the Britannia deal, for example, and £1,295 with Bank of China.

If you can’t switch, consider insuring against an increase

For the borrowers who cannot, for one reason or another, switch from a variable mortgage there is a solution â€" insurance.

A few firms provide policies that guarantee to pay increases in a borrower’s monthly mortgage repayments for a set period, typically two years, if there is an increase to the Bank of England base rate or an upward move in Libor. The downside is the policy won’t work if your lender increases its rate for any other reason, such as to boost profits. Nor is the protection cheap.

The price changes according to the market outlook, but once you buy the cover, your premium is guaranteed for a set period. For example,  to cover a £100,000 repayment mortgage would cost £30.54 for each of 24 months if you went to the leading provider of this insurance, MarketGuard.

Three-year cover is also available but is significantly dearer. More prices are available at marketguard.com/homeowner/calculator.
Broker John Charcol offers a similar policy for homeowners  and buy-to-let borrowers.

Kelly Stephens, 41, and her partner, Mark Bland, 42, a courier driver, bought a policy from MarketGuard. The couple, from Great Yarmouth, Norfolk, have no equity in their three-bedroom semi, which they share with Kelly’s sons, Dolton, 19, and Ryan, 9, so when their mortgage deal came to an end last year they were unable to remortgage.

But Kelly is pregnant and with the baby due in September she wanted greater financial security. The couple pay £27 a month for the cover on their £96,000 mortgage.

The loan is with Acenden. The rate is linked to Libor and so is at risk of rising if, as happened earlier in the financial crisis, banks start charging more  to lend to one ano ther.

Kelly reckons the insurance adds five to ten per cent to their monthly mortgage bill, but says:  ‘We are covered now for two years. That  will help us to budget.’

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