- Despite rising inflation, rates on mortgage deals still close to record lows
- Experts say you can offset the increase in your bills by replacing your mortgage
- A record number of homeowners have seen their fixed deals expire this month
The price of almost everything seems to be rising. Yet rates on mortgage deals are still near record lows.
Experts say that historically low interest rates mean you can offset an increase in your bills and save hundreds — if not thousands — a year by replacing your mortgage.
And now is the right time to do it.
Low rates: Experts say that historically low interest rates mean you can offset increases in your bills and save hundreds — if not thousands — of dollars a year by replacing your mortgage.
switch and save
‘In the coming months, household finances are likely to be squeezed by increases in energy prices, food prices, as well as national insurance payments.
But, one area where many homeowners can save money each month is on their mortgage,’ says Will Rind, head of advice at online mortgage provider Habito.
When you take out a mortgage you will be offered a special low introductory rate, often for a fixed term like two or five years, but once it expires you are free to switch to a new deal. Huh.
A record number of homeowners will end their fixed deals this month, according to broker L&C Mortgage, who estimates £29 billion of mortgages are up for renewal.
The good news is that for many borrowers it is now cheaper than ever – and by moving your home loan you will save more than enough to offset the projected £139 annual increase in our energy bills as well as other cost increases can.
Mortgage rates have hit historic lows over the past year and remain the lowest on record, with many lenders offering deals at less than 1 percent.
The best rates are available for those who own a large stake in their home and take a long term term mortgage.
For example, when a homeowner took out a five-year term mortgage in 2016 with a 40 percent deposit and a £150,000 mortgage, he would have paid interest at 1.89 percent. But if they renew now they can pay as little as 0.94 percent.
This would drop their monthly payment from £751 to £686, saving them £780 a year – more than five times what they pay extra for their energy bills.
The same homeowner who took out a two-year fixed mortgage will now pay 0.84 per cent interest, as against 1.19 per cent in 2019 two years ago.
This change would save them £24 per month or £288 annually, doubling the increased energy costs.
But someone with a 20 per cent deposit and a £150,000 mortgage would have paid 1.45 per cent for a two-year term mortgage in 2019 and would only see that drop to 1.42 per cent today – saving just £24 per year.
avoid high rates
Yet it’s worth switching deals instead of taking your mortgage at the so-called standard variable rate (SVR), the costly default rate lenders charge after a deal ends.
One in four homeowners is paying an expensive SVR.
They cost an average of £2,540 more per year than those switching to the best deals, according to L&C’s analysis.
A homeowner with a £150,000 mortgage owed on his £250,000 home typically pays £212 more per month by staying on the SVR than finding a cheaper two-year fixed deal.
The best mortgage rates are available for those who have a large stake in their home and take a long-term fixed deal
That’s £2,544 a year—enough to increase energy bills by more than 18 times the estimated average annual increase of £139.
You stand to save about £400 more now than you did last year by discontinuing the SVR, because the deals on offer are so competitive, while the SVR lasts about 3.82 percent on average.
‘Lender competition is fierce and this has helped bring down mortgage rates over the past 12 months.
“This is great news for mortgage borrowers nearing the end of a deal, but it also underscores how important it is to make a purchase,” says L&C broker David Hollingsworth.
the time is right
Mortgage deals may be competitive now but it may not last long. Last month, the Bank of England warned it could raise the base rate too soon to tackle rising inflation, which hit a nine-year high in August, not helped by a hike in energy prices.
Any base rate increase will drive up mortgage costs and is likely to coincide with an increase in the cost of living, as prices of everyday items such as fuel and food are also predicted to rise.
Switching to a fixed deal not only locks in lower rates, but it also avoids the unpredictability of how much your mortgage will cost over the next few years.
‘Borrowers prefer fixed-rate mortgages, perhaps because of their ability to budget and protection from future interest rate volatility,’ says independent finance analyst Darren Cook from Moneyfacts.
Will Rind advises, ‘If the bargain rate on your mortgage has already expired or will be within the next six months, now is the time to shop for a new deal.
Arrange to switch once your fixed deal expires, so you’re not charged for a change of lender.
A 5 percent early repayment fee on a £150,000 mortgage is £7,500, so the penalty could wipe out any savings from cheaper rates.
Some borrowers can still save mid-deal by switching to a much lower rate. Any re-pledge would have to pay an arrangement fee of between £750 and £1,500. A broker can advise you whether you can save by taking into account the fees.