The sneaky mortgage trick to save you money

by Neil Faulkner on 31 January 2011  |  4 comments
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With this little trick, you can get today's fixed-rate mortgage prices in six months' time.

If you can't bring yourself to leave your cheap tracker deal or SVR mortgage, but are worried about rising interest rates, it's possible to stick with it while hedging your bets quite cheaply. Doing so, you could get today's fixed-rate prices in six months' time.

Cheapest fixes are gone

Many fixed-mortgage deals have been withdrawn in the past few weeks and those that have been replaced have been done so with more expensive versions. John Fitzsimons wrote about this in If you don't fix now, you'll regret it.

Some withdrawn fixed deals this month

Data correct as of 23 January 2011.

As I wrote in Now is the time to get fixed mortgage deals, the cheap fixed-rate deal ship will sail before you realise it, and now, for example, the Financial Times reports that Skipton's five-year fix was removed due to unprecedented demand over two days, even though there's no base-rate rise in sight.

Yet fixes are so expensive!

In many people's eyes, fixed deals are expensive and, compared to the base rate and trackers' current rates, they certainly are. Yet in Pay 5% on your mortgage for a decade, I disputed that they're expensive, explaining that ten-year fixes are cheap in historical terms, and therefore should be satisfactory, whereas if you pay fees to switch every two years for the next decade you're going to need a good dose of luck to beat those longer deals.

Some five- and seven-year fixes are also good value right now, in my opinion, for those who don't want to be tied down quite as long. Tim Wilson at lovemoney.com financial services has also been telling mortgage customers that fixed deals may be rising, but they're still cheaper than ever before, so it's not panicking time.

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Yet we don't appear to be convincing too many people that fixes are still cheap or that we shouldn't panic, so here's an alternative:

Lock in fixed rates without leaving your deal

It's possible to lock in a fix and then have up to six months to leave your existing mortgage. You can also decide not to switch, if you so choose.

Previously, this was easier to do. Wilson told me that recently customers have been more clued up, with more of them knowing off the top of their heads what type of mortgage they have. Believe me, that's unusual!

About 18 months ago, thousands of such wise customers were taking advantage of lenders' policies by getting free fixed-rate offers lasting six months and then holding on to their existing cheap variable deals while they waited to see what happened. Many of them pulled out, because interest rates continued to fall.

The bad news is lenders have become aware of this. Now, we typically have to pay fees to get our offers and the length of time offers are valid has been reduced in many cases to just three months.

Even so, cheap possibilities still exist for hedging our bets. We can book a product in advance of our existing deals expiring or, if we're on the SVR, we can book a deal and sit on it.

Advisers' recommendations

If you want to use this technique, Wilson recommended we try Woolwich, which has some good rates and it lets us get to the offer stage with no up-front fees, and the offer is valid for six months (you will need to be careful of the product and valuations expiry dates). The downside is that you have to pay a £150 withdrawal fee if you pull out, but that's a small price to pay for peace of mind and being able to stay on your cheaper mortgage rate for longer.

Wilson says Northern Rock also has no up-front fees, and it has no withdrawal fees either, although the period you can lock in for is just four months. Abbey also has no up-front or withdrawal fees, but the lock-in period is just three months. With Nationwide you pay a £99 fee up-front and no withdrawal fees, although this is also for just three months.

I also tested the memory of David Hollingworth at London & Country, who, like Wilson, immediately suggested Woolwich. He also believes you should consider Coventry, which has a six-month offer period, and Santander, which has offers currently being held till 31 May.

In addition, I'm getting reports that HSBC has a six-month offer period.

Risks of this technique

As I've already mentioned, you may pay some fees to do this. You may also have to pay a valuation fee, depending on why you're applying for the mortgage and the lenders' terms. However, even taking these costs into account it could well be a small price to pay as an alternative to fixing immediately, with the higher monthly payments that would entail.

lovemoney.com's Wilson warned that some lenders could quite heavily punish you for this technique if you're not careful. Apparently it's been in NatWest's small print for some time that if you cancel the deal it could still charge you the arrangement fee of £999, but it had not been enforcing this. Now it has started to do so. When one lovemoney.com customer decided to pull out for personal reasons, it took some heavy handling for Wilson to convince NatWest to drop the charge.

Furthermore, it's quite possible that you'll be credit checked before the offer is made. Take this into account, because if you make too many credit applications in short periods it can affect your attractiveness to lenders.

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