Some banks have decided that they could no longer wait for the BOE to make a decision and have forced mortgage interest rates rises themselves, regardless of what the government want. It is important to realise that there is only one reason for this- they need the money. And, the only way they are going to find it is in your pocket. Those who will benefit most from the interest rate rises are banks and mortgage brokers. Both of whom have been struggling in the last few years.
So, before everyone starts to panic about the mortgage interest rate rise, lets look at some basics which should enable you to figure out whether it is worth changing your current product or not.
There are four ways which banks are seeking your cash, it is not just about the mortgage interest rate rise alone;
- Requiring a higher deposit on the new mortgage product. ( Also in the form of some of your equity.)
- Charging a high product fee.
- Short term fixed interest rates.
- Higher interest rates on new mortgage products.
Big Fat Bank Fees
First lets take the fee. Most fees for the best new mortgage products are around the £1,500 mark. A 0.25% interest rate rise, such as we just had, on a house value of £150,000 will only cost you an extra £40 per month. By paying a £1,500 fee it would take you 30 months just to break even. And, lets not forget, some older mortgages will have an exit fee too, often running into thousands of pounds ( these were usually a percentage of the loan), which needs to be factored in.
Equity & Deposits
Now, on top of that, banks now require a higher deposit on the new mortgage product. If you currently have 5% invested as a deposit, you will now need more like 20% at least. There are two ways banks can get this, as a physical cash deposit, or by utilising any existing equity that has been built up on longer term loans. Either way, you lose. It is also highly likely that banks will want a part repayment type mortgage to add extra security for them.
To Fix Or Not To Fix…
Lastly lets look at fixed rate products. The majority of deals at the moment are for fixed rate deals of two years. Experts in the mortgage industry feel that the SVR from the Bank Of England will not change for another two years, meaning that banks are tying you into a higher rate because they are hedging that base rates are unlikely to change during the term.
The best deals quoted will require a much higher equity stake from you. A fixed rate is often more expensive long term than an Standard Variable Rate lifetime tracker. Don’t forget, when you come of the fixed rate your mortgage payment will be guaranteed to jump up as banks have built in an extra 3 or 4% over BOE base rate clause. There is no guarantee that rates will have recovered by then either.
In the long run, most people will be better off staying put. If you are already on an SVR rate ( especially with existing older trackers) and you are worried about rises, then you generally have the option to overpay the mortgage, which effectively pays it down faster. If the banks are looking for all four of the above items in one deal, then it’s going to cost you very dearly indeed over the long term.
Moving mortgage can be a very expensive business, be sure to weigh up all the costs over the lifetime of the loan before being swayed by just the mortgage interest rate rise alone.