MILLIONS of homeowners throughout the United Kingdom could still give themselves and their families a Christmas present to remember if they have not already saved money by switching their mortgage from a standard variable rate to a cheaper discounted or capped rate.
And if your home has increased in value since you took out your present mortgage, remortgaging could also raise some money to help finance your Christmas or any other major expenditure.
But whatever your reasons for switching your mortgage one thing that’s certain is that it is very difficult to imagine any circumstances in which it would be of any advantage to you whatsoever to stick to your present mortgage lender’s standard variable rate.
This recommendation comes from nationwide financial advisers Independent Corporate Planning Ltd on the day that a landmark Government report to Chancellor of the Exchequer Gordon Brown reveals that millions of ordinary mortgage holders are subsidising cut-price deals being offered to new borrowers.
First-time buyers or those remortgaging their property to build extensions or raise extra cash were often found to do better than loyal customers who had had their mortgages for 10-15 years with the same lender.
The report by Professor David Miles of Imperial College, London, highlights these “distortions” in the housing market caused by the special deals being offered mortgage lenders to attract new business.
Government officials believe that investigations by the Office of Fair Trading or the Competition Authority could be recommended if lenders refuse to clean up their act.
Chancellor of the Exchequer Gordon Brown revealed the report in the build-up to his pre-Budget report tomorrow (Wednesday), and he is expected to come under pressure to address the instances of unfairness uncovered by Professor Miles.
In the meantime, Independent Corporate Planning Ltd director David Miles (no relation to Professor Miles) comments: “We are strongly recommending that all mortgage holders take professional advice and shop around for the best deal.”
APPENDIX: Choosing the right mortgage for you
If you have already done some research into arranging your next mortgage or remortgage, you’ll know that the mortgage market can be a bewildering place. Increased competition between mortgage lenders means there are excellent deals to be had, whether you are moving home or just looking to save money by switching your existing mortgage to a new lender.
But this increased competition also means there are a staggering number of different mortgage products available, and finding the right mortgage can be both difficult and time-consuming. After all, there are literally hundreds of different mortgage lenders offering thousands of different mortgage and remortgage packages between them. And the cheapest mortgage is not necessarily always the best value mortgage.
There are standard variable rate mortgages, fixed rate mortgages, offset mortgages, current account mortgages, capped rate mortgages, discounted mortgages, base rate tracker mortgages, buy-to-let mortgages, self-certification mortgages, and mortgages that offer up to 125% of the property value.
There are adverse credit mortgages for people who have credit problems (for court decrees for debt) or have been refused a mortgage in the past.
Interest rates and the amount you can borrow vary from one lender to another, as do the tie-in periods and redemption penalties on some loans.
Several banks and building societies will pay some or all of the arrangement, survey, and legal fees involved in a mortgage or remortgage.
Your mortgage is probably the biggest financial commitment you will ever make, so it makes sense to seek expert advice to ensure your mortgage is the right one for you.
So what are the various options?
Standard Variable Rate
With a standard variable rate (SVR) mortgage, the interest rate may go up or down during the course of the loan. Sometimes, the rate will remain unchanged for months at a time, but at other times it may fluctuate from one month to the next.
The SVR charged by mortgage lenders is determined mainly by the Bank of England Base Rate, which is reviewed once a month. When the Bank of England changes the Base Rate, mortgages lenders will usually adjust their SVR up or down accordingly.
Variable rates are currently at an all time low of around 4%. However, in the past there have been periods where they were much higher – up to 15% or more.
It is therefore important to bear in mind the effects of any future rise in interest rates when opting for a variable rate mortgage.
Fixed Rate
With a fixed rate mortgage, the interest rate is guaranteed to remain the same for a set period of time, typically one, two, three, five, or ten years.
This gives the advantage of regular, unchanging monthly repayments during the fixed rate period. After the fixed rate ends, the loan normally reverts to the lender’s standard variable rate.
Fixed rate mortgages are most suitable for those who wish to have absolute certainty about how much they are going to have to pay. It’s ideal for people who have a limited income, need to plan carefully in advance, and don’t want to be stung by any nasty interest hikes.
But there are a couple of disadvantages to fixed rate mortgages. Firstly, if interest rates should fall during the fixed rate period, you will not benefit from the savings like you would with a variable rate mortgage. Secondly, the arrangement fees on fixed rate products are sometimes higher than other types of mortgages.
Capped Rate
A capped rate mortgage is similar to a fixed rate mortgage except that the interest rate can go down in line with the lender’s standard variable rate if the Bank of England Base Rate is lowered.
In other words, the interest rate on the mortgage is capped at a certain level for a set number of years. It is guaranteed not to exceed this level during the capped rate period.
In many ways this is the best of both worlds as you get the security of knowing what your maximum monthly repayments will be for a fixed period, but you can still benefit from any reduction in interest rates.
Capped rate mortgages are good for people who want to benefit from potential drops in interest rates in future, but who also wish to keep a lid on the maximum amount they have to pay in the future.
As with fixed rates, there are normally arrangement fees for this type of mortgage, and it is important to seek advice on whether the benefits of a capped rate deal outweigh any fees that may be charged.
Discount Rate
A discounted rate mortgage gives you a reduction on the lender’s standard variable rate for a fixed period of time.
The savings that you make through this introductory offer are yours to keep, and do not have to be repaid later, subject to there being no tie-in conditions or early redemption penalties.
Discount rates are good for people who want to make a significant saving in the early years of their mortgage.
Tracker mortgages
Base Rate tracker mortgages are another form of variable rate mortgages.
The advantage of tracker mortgages is that, unlike standard variable rate mortgages, which are not guaranteed to move in line with changes in the Base Rate, tracker mortgages have their interest rates directly linked to the Bank of England Base Rate and are guaranteed to always be a certain percentage above the Base Rate - no more, no less. Another plus for this type of mortgage is that most trackers immediately pass on any reductions in Base Rate – unlike the building society rates, which are sometimes slower to be adjusted.
Others
Cashback mortgages are good for people who need additional funds for soft furnishing, for instance, and mortgages of 125% of property valuation will be attractive for those needing debt consolidation at a lower interest rates than personal loans or credit cards.
Sub-prime mortgages will help people who have had credit problems in the past to get back on to the property ladder and then switch to a cheaper deal in later years.
Non-status mortgages can be obtained up to 90% of property valuation and require no salary details whatsoever – the question isn’t even asked. Self-certification is similar, except that you state your income, although it is not checked. These deals are best for people whose income is variable - perhaps because it involves a significant amount of commission or bonuses – and is difficult to fully prove.
Current best-buys from Independent Corporate Planning Ltd:
Fixed – Northern Rock 2 year fixed at 4.19% with no extended tie-in. £495 arrangement fee (can be added to loan).
Capped – Bristol & West 3 years capped at 4.89% with no extended tie-in.
Discount – Dunfermline Building Society 2.29% discount for 2 years (i.e. 3.2% payable at present) then reverts to variable rate, which is currently 5.49%. No extended tie in. Only lend in Scotland. For England (or Scotland) best discount is Lambeth Building Society with a 2.56% discount for 2 years, meaning you pay 3.38% instead of the variable rate of 5.94%.
Tracker - Norwich and Peterborough tracker 0.00% over base rate for 1 year, then 0.65% over base rate for term. Free legals free valuation (up to value of £225) no early redemptions, £295 arrangement fee which can be added to the loan.
Standard Variable Rate – Coventry 4.25% up to 95% LTV with £199 fee.
None of the above has any tie-in or penalties beyond the offer period.
In conclusion Independent Corporate Planning Ltd director David Miles said: “Unlike moving house, arranging a remortgage can be surprisingly hassle-free. There are no chains of buyers to worry about, so with the right help and advice from an independent firm such as ourselves, the whole process can often be completed in a few weeks.”
Notes for the editor:
- The HM Treasury press release about the Miles Review interim report can be downloaded from: www.hm-treasury.gov.uk/newsroom_and_speeches/press/2003/press_miles_03.cfm
- The website of Independent Corporate Planning Ltd can be found at www.icplanning.co.uk
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