Yikes! What should I do with my mortgage?

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Central banks around the world have been furiously debating the direction of interest rates and those of you coming to the end of a fixed-rate mortgage may well be doing the same — perhaps with even more passion.

With a quarter-point rise on both sides of the Atlantic this week, the pace of the increases is slowing as policymakers fret about mounting problems in the banking system. But inflation is still raging — especially in the UK, where your monthly grocery bill may well rival your mortgage.

So has the Bank of England done enough to contain inflation, or can borrowers expect rates to rise even further? Rather than focus on the past five days, my advice is to think about the next five years.

Rushing into a fix could be costly. Fears that the banking crisis could tip the US and other economies into recession has already caused swap rates to dip (the market indicator of the long-term cost of funding).

Following 11 consecutive rises, could we soon see rate setters pause for breath? And, if inflation is tamed, could we even see a rate cut later this year or next — particularly if the economy takes a turn for the worst?

The keenest two-year fixes are priced pretty much at parity with the new 4.25 per cent base rate, but before the BoE announcement on Thursday, Santander and Halifax both reduced their best five-year fix to 3.99 and 3.94 per cent respectively, and from Friday, Nationwide will offer 3.94 per cent (proving borrowers have healthy levels of equity in their property). Longer-term rates for landlords have also seen signs of improvement.

Although markets are pricing in one more rise this summer, after that, you might be tempted to bet rates have further to fall.

“This is not the time to fix,” says investment commentator Mark Dampier, noting how markets are reacting to the fallout from the demise of Silicon Valley Bank. “Things are already beginning to break in this interest rate cycle and, given the state of the economy, I can’t see how rates can get much higher. Yes, most people want peace of mind, but if you can afford to take a risk, I’d go for a tracker.”

To assess your risk appetite, use an online mortgage calculator to work out how much you could save — or have to pay — if rates move either way (my favourite is the Money Saving Expert one).

With talk of a coming credit crunch, lenders will all be chasing borrowers on good incomes with lots of equity in their homes. Some believe this could bring rates as low as 3.5 per cent on a five-year fix by the end of 2023.

It will be tougher for those with big mortgages who are refinancing for the first time — and we all need to watch our credit scores like a hawk.

Here are some practical remortgaging strategies for you ponder as you approach your own household’s big interest rate decision:

Time for a tracker?
“Tracker rates are fast becoming the new black,” says Andrew Montlake, managing director of mortgage broker Coreco. He says wealthier clients “who can afford to take a risk” are most likely to pick them.

The chief advantage is flexibility. Unlike fixed-rate deals, tracker mortgages rarely carry early repayment charges. So if rates drop, or the market moves against you, you can remortgage to a fix at any time without penalty (note that arrangement fees of £999 are broadly similar to fixes).

Broker L&C Mortgages reports that one in five of its clients are remortgaging using trackers or discounted rates (commonly offered by building societies and priced at a discount to their SVR, they can have quite specific property requirements).

At the time of writing, Chorley Building Society was offering a discounted variable rate of 3.8 per cent, and Barclays had a two-year tracker at 4.39 per cent for Premier customers with 60 per cent loan to value.

Montlake adds that with some lenders, it’s possible to go 50:50 and split your loan between a tracker and a fixed-rate.

Prepare to switch — then ditch
It’s possible to negotiate your next fixed-rate deal six months’ before your current fix ends. However, “If people do lock in a rate, it doesn’t mean they have to take it when the time comes,” says David Hollingworth, associate director at L&C Mortgages.

Check the terms and conditions carefully, especially if you’re locking into a new rate with your existing lender. But if you ditch a pre-planned fix and switch to a more competitive deal, you’re unlikely to incur any charges, as arrangement fees are normally payable on completion.

Brokers tell me there’s been lots of reworking of deals in recent weeks to hop on to lower rates (this is where they can really add value).

If this involves a product transfer — switching to a better deal with the same borrower — it can be pretty speedy. However, if you start afresh with a new lender, be aware it could take at least two months to refinance and switch.

“You could have a period where you drift on to your existing lender’s SVR (standard variable rate) which are now commonly 7.5 per cent, though some are over 8 per cent,” Hollingworth warns. Ouch!

Overpay your way
Overpaying your mortgage to bring down your loan-to-value ratio (LTV) and access better rates is very popular — but the typical repayment cap is 10 per cent of the value of your loan within a 12-month period.

NatWest is raising this to 20 per cent for all new and existing customers (bravo) and brokers speculate that more lenders could follow.

The best rates are for borrowers with an LTV ratio of 60 per cent or lower. Loan pricing typically moves in 5 percentage point increments.

“Even if you can overpay enough to take your LTV from 76 to 74 per cent, you could open up better rates,” says Hollingworth.

Don’t forget you can make an overpayment before you secure your next deal. “If you’ve hit the cap on a £100,000 mortgage but have £10,000 in savings, simply apply for £90,000 with the new lender and provide your solicitor with the funds to make up the shortfall,” he adds.

A decade-long deal?
Rates on seven- and 10-year fixes are almost on a par with five-year deals, but brokers say while many borrowers are considering them, few want to commit, given the early repayment penalties.

“Porting your loan to a new property is possible with some lenders, but remember that this is a possibility rather than a right,” Montlake says. If you needed to borrow more to buy your next home, you’d have to do so with the same lender.

If you’re in your “forever home” and have 10 years left to run on your mortgage, this could buy you certainty and save you money on fees. But for the average borrower with decades left to run on their home loan, the lack of flexibility will be too high a price.

Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. [email protected] Instagram @Claerb

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