PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

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

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