This piece first appeared in Reader's Digest in April 2000
The text here may not be identical to the published text
How would you like to save thousands of pounds over the next few years? Well, if you have got a mortgage and you have not thought of changing it for some years, then read on. Most of us stick with the same mortgage we have had since we bought our home. But that can be a very expensive mistake. Millions of homeowners are wasting thousands of pounds by doing nothing.
Mortgages in the UK have never been so cheap. It is all due to competition. As new banks spring up, everyone is after our business. And to get it they are making us offers we should not refuse. The choice can seem bewildering. But do not let that put you off. Just look at the figures. If you have a £50,000 loan and you’re paying the standard sort of interest rate – say 7.74% - then there are risk-free deals around that will save you £70 a month. And if your mortgage is twice as big, the savings are doubled.
For example, my best deal at the moment is Abbey National. It offers a cut of 1.84% on the standard mortgage rate for five years. That will save you £77 a month on a £50,000 loan or £4620 over five years. That saving applies to people with an interest only mortgage – the sort you have with an endowment or savings plan to pay off the capital at the end of the mortgage. But even if you have a repayment mortgage – where your monthly payments go towards paying off some of the capital as well as the interest - the savings are nearly as big – around £55 a month or £3300 over five years.
The snag? You are locked into it for the five years – you cannot change if a better deal comes along. Or if you do, Abbey will take back all the money you have saved. But once the five years are up – and the monthly savings stop – you are free to look around.
Another top deal is from the Scarborough Building Society. It will cut 1.46% off its standard mortgage rate FOR THE LIFETIME OF THE LOAN! On a £50,000 loan that will save you £850 every year compared with a full price mortgage from another lender. It’s enough to pay for a holiday – or two! – every year. And with this deal, if a cheaper mortgage comes along you can change to another lender without any financial penalties.
You have to weigh up the choice yourself – do you want a slightly bigger discount but run the risk of a big penalty if you suddenly want to pay off the mortgage or move it somewhere else? Myself I prefer flexibility – who knows what the world – or your life – will be like in the spring of 2005?
One alternative to a discounted rate is a tracker mortgage. They guarantee to be a fixed percentage above the base rate fixed by the Bank of England. Halifax currently offers a tracker 0.75% above the base rate, around 1% less than the standard variable interest rate lenders charge. You can probably do better with a discount. But some people like the guarantee. This deal lasts for five years and there are no penalties if you leave.
It’s a fix
Discounts off rates are the most popular deals around. But they do not suit everyone. Maybe you are fed up with the Bank of England changing the rate of interest every month or two and want to know what your repayments will be, year in year out. Or maybe you mortgaged yourself up to the hilt to buy that dream home and you just have to know that your repayments will not shoot up if interest rates rise again. Either way, you should consider a fixed rate mortgage. These deals guarantee the rate of interest you will be charged over a fixed period – typically between one to five years.
Of course, fixed rates are a gamble. If interest rates carry on rising, you’re in the money. But if they fall you can find yourself paying more than the going rate. And almost all fixed rate deals impose a big penalty on customers who try to get out before the end of the fixed rate period. Some will charge a penalty even after that – locking you in for years on what might be a high interest rate. They should be avoided. But if you can find a fixed rate around 1% less than the standard mortgage rate with no penalties if you leave the deal once the fixed rate period is over then that could be the one to go for.
If, like me, you are not a gambler than consider the fixed rate’s close relative the ‘cap’. With these one-way bets the rate of interest can go down any amount; but the lender guarantees it will never go up beyond a certain level – the cap. Generally you are unlikely to do as well as on a fixed rate. But it does protect you if rates tumble.
Fixed or variable rate is not the only choice you have to make. There is a growing fashion for flexible mortgages. In the past, you made the monthly repayments and that was that. If you came into some money, you could be penalised for paying extra off your loan. And if you lost your job, the only sympathy if you missed a payment would be a threatening letter! Now, things can be different. Flexible mortgages allow you to miss payments, increase or decrease them or pay a lump sum off the loan – and then borrow it back later if you need it.
Standard Life Bank started the trend to flexible mortgages and it took £4 billion of business in 1999. But it is not the most flexible mortgage around. Only two – Current Account Mortgage from First Active Financial and the Virgin One account from Virgin Direct – give total flexibility. But most people do not want that. What they want is the ability to pay off a bit extra if they can. And for that all you need is to make sure that the interest on the mortgage is calculated every day (or at the worst every month). Many lenders still work it out once a year. So if you pay £1000 off your mortgage you pay interest on the whole loan until the lender gets round to doing the sums. So make sure you get daily or monthly interest calculations. For most people that’s enough flexibility. But be careful with fixed rate mortgages – you could face a penalty if you pay any of it off early.
The cost of changing
People are put off changing their mortgage by not knowing how to do it or worrying that they will not really save money. That is why one in two borrowers now seeks help – at a price – from a mortgage adviser. Others are put off because changing usually means spending some cash up front.
There are four charges you may face.
·Valuation – the lender will want to make sure your property is worth more than the loan.
·Solicitor – there will be some legal documents to deal with.
·Arrangement – some lenders charge you a fee for arranging the loan – a real cheek. It’s as if Dixons charged you a fee for selling you a television.
·Advisor – you may choose to pay a broker for advising and sorting out the deal.
Reckon on up to £300 for EACH of the first three of these costs - the advisor may be more – up to 1% of the loan. Of course, you may not use an advisor. And many lenders will not charge an arrangement fee - they are less common on discount deals than on fixed rate mortgages. So it is worth looking around for low fees or lenders who will waive or pay them – otherwise you could end up spending your first year’s savings on making the change.
One thing is for sure – the MOST expensive thing to do with your mortgage is almost certainly to do nothing.
Interest rates and mortgage offers change frequently. Reader’s Digest cannot guarantee that the deals described in this piece will be available at the time of reading.
Abbey National – 0800 555 100
Scarborough Building Society 08705 133 149 or 01723 355 111
Halifax 0800 203 049
Standard Life Bank 0845 845 8451
First Active Financial 0345 743 743
Virgin Direct 0845 600 0001