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Friday 24th of October 2008
December 5, 2007

Fixed-rate remortgagers should consider options early

by Gill Montia

Homeowners among the 1.4 million who will be coming off fixed-rate mortgage deals in the next year will be facing the full ramifications of the credit squeeze.

The cost of lending between banks has increased to around 1% above the Bank of England’s base rate and lenders are increasing the cost of their loans.

The trend began last month with Standard Life raising its standard variable rate by 0.15 percentage points, to 7.46%, and Nationwide has now increased its tracker rate by up to 0.15 percentage points.

As a result, fixed-rate borrowers with a typical repayment mortgage of £200,000 could see their monthly payments rise by up to £200 a month.

Jonathan Cornell, managing director at Hamptons Mortgages, is advising those coming off fixed-rate deals to be active: “because if you come to the end of a fixed-term and don’t remortgage you will be put on the lender’s standard variable rate which will be northwards of seven per cent.”

He suggests that those with a repayment mortgage could ease costs by switching to an interest-only mortgage but that this should not be seen as a long-term solution.

Another temporary solution is to extend the duration of the loan; a £200,000 mortgage will be around £150 a month cheaper over a 25-year term rather than a 20-year term.

A further option (depending on the lender) is to remortgage for more than is needed and repay the extra cash immediately, as some lenders will then allow borrowers to make underpayments, or take a payment holiday.

Ray Boulder of mortgage broker John Charcol, points out that: “If you have a £200,000 mortgage on a £300,000 property you could remortgage for £210,000 and repay the extra £10,000 immediately … if you don’t use the £10,000 buffer it won’t cost you a penny, but it gives you flexibility because you have ‘overpaid’”.

Mr Boulger is also recommending that remortgagers get their applications in early, as interest rates may be better now than in the New Year.

The same applies to valuations, as anyone borrowing close to 75% of the value of a property may be better placed with an early valuation, if lenders tighten their criteria and property prices fall.

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