Strange Times For Mortgage Borrowers
Should you remortgage now, or wait until the credit crunch is over? Neil Faulkner has conducted an experiment to find out.
Many people are actually paying less by sitting on the Standard Variable Rate (SVR) than they'd pay in an introductory mortgage deal! These are strange times.
But what if house prices fall? Right now you might be borrowing less than, say, 80% of the value of your home. But in a few months your house may have fallen in value so that you're borrowing more than 80%. This makes you less attractive to the lender so, consequently, remortgaging in the future is likely to be both more expensive and more difficult.
I'm going to run a series of experiments on this matter to see whether it's worth switching from an SVR to an introductory deal now, even if that deal is initially more expensive.
How I'll bubble the beakers
I'm shortly going to get on with my first test. In all the following examples, I'll use a £100,000 repayment mortgage with 15 years remaining. All the deals will be for five years with no extended get-out penalties. I don't have much space so I'll just compare fixed mortgages. The only element I'll vary in my examples is the house price.
I won't compare the interest rates of these deals, because that would exclude the cost of fees. Instead, I'll compare mortgages by telling you their true cost over the length of the deal, including interest and fees. (I'll estimate £250 for legal costs, where appropriate.) I might say, for example, that the best deals cost you £50,000 over five years. Using the true cost like this is the simplest and best way to compare mortgages.
In order to compare introductory deals to SVR mortgages, we need to know how much the latter cost. Hence, I'll now give you two SVR mortgages:
1. Anyone being charged 4% interest for their £100,000 SVR mortgage will pay about £44,500 over five years.
2. Anyone being charged 5% would pay about £47,500 over five years.
These figures are assuming the SVR remains the same for the whole five years, which is quite an assumption, but also a necessary one.
The 70% threshold
First, let's take a look at examples for those of you who currently are borrowing less than 70%.
Let's say your house is worth £155,000. (Remember, in all my examples your mortgage is £100,000.) This means you are borrowing a little less than 70%. Some of the best deals would now cost you £47,500 to £48,500 over five years, with Coventry, Clydesdale/Yorkshire Bank, Principality BS and Britannia BS among the cheapest lenders.
But what if your house drops 10% in value so that you're borrowing more than 70% of its worth? It's now worth £140,000 when you try to remortgage. Assuming the best rates are still similar to today's, your mortgage would still cost you around £47,500-£48,500, although there are slightly fewer lenders competing at the top. These lenders include, again, Yorkshire Bank, Principality BS and Britannia BS.
After my first experiment, we find that the difference is negligible. Getting a fixed deal costing £47,500 doesn't compare well if you have an SVR mortgage of around 4%, which costs £3,000 less at £44,500. However, it compares OK against a 5% SVR, which is also £47,500 over five years. And of course your SVR could rise in a year or so, while the fixed rate will stay the same through the next five years.
Still, as rates aren't likely to rise in the next few months, it seems to me that people who are in danger of rising above the 70% threshold don't have to rush their decision.
The 80% threshold
80% is a key figure for many lenders, so I thought we'd see something more startling. Compared to the 70% threshold, the best deals were around £1,000 more expensive at £50,000, and there were slightly fewer lenders offering around the top rate, but otherwise results were broadly the same.
The 90% threshold
Now you have a £115,000 home, so that's less than 90% you're borrowing. The cost of a deal is £51,500-£52,000 over five years. If your house price drops to £110,000 -- more than 90% -- you'll find that perhaps just three lenders offer any kind of deal at all. Expect to pay at least £58,000 now, which is what Abbey would charge you.
If you have a mortgage that's likely to drop below 90%, you might benefit from remortgaging, but paying £51,500 is a hell of a premium to pay compared to the £47,500 that you're likely paying now. Your SVR would have to rise extremely steeply inside the next two years for the switch to have been worthwhile.
So now you know. Most of the results are not thrilling, but it was worth looking into.
I wouldn't panic if you're on a cheap SVR. It'll likely be some time before interest rates start to rise. It would certainly be a shock if the Bank of England Base Rate rises this year, and I'd even be a little bit surprised if it rose inside 18 months.
Consider how much money you'll save in the next year simply by staying on the SVR. Think about overpaying on your current mortgage, rather than paying extra in a remortgage.
That way, you'll build up a larger equity stake in your home which, as we have just seen, is vital for getting a good deal in this market.
Mind you, in a few years, lenders will probably compete harder, and offer better deals at 90%. My main worry would be if mortgage lenders decide to raise the SVRs this year even if the Base Rate doesn't go higher. That's just a possibility to consider when making your decision.
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