Every month, tens of thousands of borrowers terminate their fixed rate mortgages. In most cases, that means their mortgage payments will go up – sometimes by a significant amount.
But there are steps you can take to avoid these higher costs. In this article, Telegraph Money explains how fixed rate mortgage agreements work, as well as how to get the lowest rate possible and reduce your repayments.
What is a fixed rate home loan?
If you take out a fixed rate mortgage, the interest rate on the transaction will be locked in for a specified period, whether it is two, three, five, or 10 years.
For example, you could get a five year fixed rate mortgage charging 1.3 pc. You are guaranteed to pay this rate for the entire five-year period, regardless of what happens to the wider interest rates or the economy.
This gives the borrower the certainty of knowing how much their monthly mortgage payments will be in pounds and pence. For many households, this is a major help in budgeting. A mere 0.5 percentage point increase in the rate could add hundreds of pounds to your monthly mortgage bill.
What exactly happens when my fixed rate ends?
Rates that are not fixed are called variable rate mortgages. These include, for example, follow-on mortgages, which track a central rate such as the Bank of England discount rate.
But the most common variable rates are called “standard variable rates” or SVR mortgages. These are the rates borrowers spend at the end of their fixed rate contract. They are currently much higher than most fixed rate offers and can be as high as 4 or 5 pc.
For example, a lender might offer a two-year fix to 0.99 bp, but once the deal is done, customers will switch to the SVR which is 3.49 bp. That’s a difference of £ 371 per month on a £ 300,000 mortgage over 25 years.
SVRs do not directly follow the discount rate, but are instead set by individual lenders and increase or decrease at their discretion. However, they tend to move more or less depending on the wider interest rates.
So if interest rates go up, you should expect your SVR to go up sooner or later.
What to do at the end of a mortgage loan contract?
You can either do nothing and pay the higher SVR rate, or, depending on your situation, remortgage yourself on a new business.
Those who want to remortgage to a cheaper deal should ask their existing lender for better rates three to four months before their current deal ends.
Lenders should contact you before your current contract expires, but many customers might ignore them and end up automatically switching to SVR without knowing it.
If you receive an offer from your lender, be sure to compare it to other offers online using the best buy charts or with the help of an advisor.
If the value of your property has increased significantly since you took out your mortgage, you will likely qualify for much lower rates, so be sure to shop around before closing a deal. A quality mortgage broker can help ensure you don’t overlook the best possible rates for your situation.
Once you have chosen the best deal, you will need to pass the credit checks and the lender’s affordability assessment. At this point you will receive a binding offer.
If you’ve re-mortgaged yourself from another lender, a lawyer will take care of the paperwork and a signed deed will be sent to your new provider.
They will then pay off your existing mortgage by sending funds to your current lender, and once the old mortgage has been paid off in full, you’ll start paying off the new lender.
When should you not remortgage?
While an SVR is not a good idea for most people, SVRs can be beneficial for those who wish to make mortgage overpayments.
This is because most SVRs do not have a prepayment charge, so you can usually pay off your entire mortgage without incurring a penalty.
If you have a relatively small mortgage, say less than £ 50,000, it may not be worth remortgage if the costs of the new mortgage outweigh the potential savings. Additionally, some lenders will not accept small mortgages.
If your circumstances have changed, for example a household member has stopped working to take care of the children, then your income will be considerably lower and you may not be accepted by a new lender.
The same is true if you suddenly have bad credit – a mortgage provider will perform a credit check on you when you remortgage, so all the black marks will be visible and they can choose not to lend.
What is a tracker mortgage – and should I get one?
Trackers tend to follow the Bank of England base rate by a margin above the rate, which currently stands at a record low of 0.1 pc. So, for example, you could pay the discount rate plus 1 percentage point. You would then pay a rate of 1.1 pc.
With variable rates, borrowers incur higher payments when rates rise. The nature of a tracker mortgage means that the amount you pay in repayments each month can change, which isn’t always right for borrowers who want the security of a set budget.
How much will it cost to remortgage?
Remortgage doesn’t come cheap – you might be required to pay a multitude of fees, including product fees (ranging from £ 500 to £ 2,000 upfront), appraisal fees (usually between £ 300 and £ 400), attorney fees (up to £ 400 and sometimes more), transfer fees (between £ 25 and £ 50) and potentially other fees as well.
If you choose to use a broker, this may also incur fees. But some brokers are free to the borrower and instead make a small commission from the lender once the mortgage is underway.