PERSONAL ACCOUNT

Rate rise? Here’s a mortgage loophole that could save you thousands

It’s all very well to read the oft-quoted advice that mortgage rates are at rock-bottom and therefore you need to lock into a new deal right now. What happens if you’re already stuck in fixed-rate arrangement that you cannot end without paying a penalty?

I have a partial solution. And I’ve just done it with my own mortgage.

Since the financial crisis in 2008-09, about one in four new mortgages has been taken out on a fixed rate basis. Two-year fixes are the most popular, but a great many five year fixes were also sold. If you took out a good five-year fix in, say, 2013, so due to finish next year, you might well be paying a rate of 3.4pc or even 3.6pc.

But if you look now at the best rates for a five-year fix, they start at about 1.6pc. You definitely want one of those while they’re around.

The problem is that rates are beginning to rise. Tesco has just increased its five-year fixed rate mortgage, for instance, from 1.68pc to 1.78pc. The best 10-year rate, previously from Coventry, has just been withdrawn. And the underlying cost of funds to banks – the factor that ultimately determines the rates paid by mortgage borrowers – is sharply on the up. In fact the cost of five-year money being lent between banks has roughly doubled since October.

That hike hasn’t yet filtered into our mortgage rates, but it’s coming. The housing market is so subdued – thanks mainly to the deadening effects of stamp duty – that lenders are not using up their mortgage pools as quickly as they’d expect. And they have to slice down their rates to compete for fewer applicants. We borrowers are in clover, but it’s not going to last forever.

With rates starting to rise and likely to rise further, the pressure really is on to grab a good rate as soon as possible.

Here’s the secret if your fixed mortgage ends in the next year or so.

You need to do more than look at the lowest mortgage rates available. You need to look at how long the offer will remain available once your application has been accepted. You then apply for the best rate with the longest possible application period, as soon as you possibly can. That secures you at least some form of “insurance”.

If time goes by and you are able to get an even better deal, so be it: you may lose a few hundred pounds in application fees but you can weigh that up, safe in the knowledge that at least you’ve a good rate in the bag.

Here’s an example. At the time of writing Barclays offers a five-year deal at 1.7pc. The loan remains available to you for six months from the time of application.

A better rate, though, would be 1.59pc from Atom Bank. But it is only available for 13 weeks from the date of offer.

For a £200,000 mortgage, the difference between those two rates even over five years isn’t huge, so you need to factor in fees associated with the mortgage, as well as just the rate.

But the safest course of action

Some are considerably riskier than others and many are new schemes with little history and less security.

On page 10 two of the more credible and attractive current deals are described: one offering a variable rate of 4pc and another a fixed 5.25pc.

Apart from the rate on offer potential investors need to satisfy themselves on three counts. One, are the arrangements transparent enough for you to make a reasonable assessment of risk? Two, is there going to be a way of getting your money out, if needed? And three – is there a reputation at stake?

Borrowers can get excellent deals – for now. But savers can profit as lenders, too