Mortgage trap that could see your interest rate rise to 7.99% adding £4,380 a year to bills – how to avoid it
HUNDREDS of thousands of mortgage borrowers could be in for a nasty shock with their bills.
Falling interest rates have left many people wondering whether now is a good time to switch to a tracker mortgage.
These deals have variable rates that usually move in line with the Bank of England base rate.
If the base rate moves down, so does your repayment rate or if it rises, so will your bills.
There are now around 643,000 homeowners on tracker mortgage, according to the latest data from trade body UK Finance.
Some of these are so-called “lifetime” deals, where you stay on the rate indefinitely or until you decide to switch to a new deal.
But some have fixed terms of two, five or even 10 years and when this period ends you are automatically transferred to the lender’s Standard Variable Rate (SVR).
These rates are among the highest you can get on a mortgage.
The average two-year tracker rate currently stands at 5.68%, according to moneyfactscompare.co.uk.
By comparison, the average SVR currently stands at 7.99% – however, some are sitting as high as 9.24%.
The difference means that on a mortgage of £250,000, you can expect a monthly repayment of £1,562 on a typical two-year tracker.
However, if you slip onto the lender’s SVR your bill shoots up to £1,927 – that’s £365 more than on the tracker and an extra £4,380 over a year.
HOW TO AVOID BILL SHOCK
The exorbitant costs of an SVR means it’s really important that you don’t accidentally fall onto this rate.
Most lenders will contact you to let you know that your mortgage deal is coming to an end.
But when you take out a mortgage, it can be worth setting a diary reminder in your calendar six months before the mortgage term ends reminding you to look for another deal.
Nicholas Mendes, technical director at mortgage broker John Charcol, said: “It is crucial to keep an eye out for these notifications, as failing to act in time could result in falling onto the SVR without realising it.”
It’s important that you start to research and understand your options well in advance of your mortgage term ending so you aren’t panicked into the wrong option.
Just like fixed-rate mortgages, customers with a tracker mortgage can look for a new deal before their current term ends.
The flexibility of tracker mortgages is one of the main upsides of these mortgage deals.
Often you can repay the deal at any time without paying any early repayment charges (ERC).
However, this is isn’t always the case, warns Mr Mendes.
He said: “One thing to be mindful of is early repayment charges (ERCs), which may apply if borrowers decide to switch deals before the term ends.
“Not all tracker mortgages have these charges, but they do exist in some cases. It’s important to review the mortgage terms carefully to avoid unexpected costs when remortgaging early.”
However, you can usually switch in the last six months of a deal without paying any early repayment or exit fees – even if they are attached to the mortgage in the earlier stages.
You can choose another tracker or switch to a fixed-rate if you are looking for more certainty over repayments.
An independent mortgage broker can help you weigh up your options if you are unsure.
An added benefit of some tracker mortgages is that they allow overpayments without penalty.
Trackers are also a great option if interest rates keep falling, but there are no guarantees and your bills could be unpredictable if there sudden changes to the wider economy.
On the other hand, the benefit of a fixed rate mortgage is that you know exactly how much your repayments will be over the duration of the term.
If you are worried about repayments it could be worth fixing. We have explored in more detail the pros and cons of fixing your mortgage.
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.