Grab a new deal but tread Libor scandal highlights the perils of choosing a home loan. By Esther Shaw

BORROWERS are being urged to tread carefully when choosing a new mortgage deal amid concerns over the Libor rate-fixing scandal. Many homeowners are looking to remortgage in the wake of a host of lenders having hiked up their standard variable rates (SVRs). This has pushed up monthly mortgage payments for families at a time when household finances are already stretched to their limits.

Further, the news last week that ING Direct has joined the long line of lenders announcing increases has prompted concerns that even more could follow suit.

According to brokers, ING Direct’s move to put its SVR up from 3.5 to 3.99 per cent from August 1 should serve as a stark reminder to all borrowers to review their mortgage. “Many have been happily sitting on their lender’s low SVR for some time,” says David Hollingworth from London & Country. “However, movements over the past few weeks have been a clear indication that changes to bank and building society SVRs are not directly linked to the Bank of England base rate, which hasn’t moved.

“Yet again we see how the difficult market conditions have a bearing on mortgage rates for existing borrowers as well as new borrowers. If your home loan is no longer competitive, then now is the time to remortgage to a new deal.”

Equally, given the Libor-fixing scandal (see below), taking advice on your decision from an independent broker is more important than ever. ING Direct is blaming market conditions for its decision to increase its SVR, the rate you revert to at the end of any special mortgage deal, such as a fixed rate or tracker.

This comes just weeks after Halifax, the Co-operative Bank and Clydesdale/ Yorkshire and Bank of Ireland all notched up their SVRs.

“The decision by ING Direct was no real surprise as it was one of the lowest SVRs available,” says Adrian Anderson from broker Anderson Harris. “While we don’t expect increases across the board, lenders can raise their SVR on a whim. Borrowers should not take it for granted that rates won’t rise. They should remain vigilant and check what their lender is charging.”

This is a view shared by Ray Boulger at broker John Charcol.

“While most are likely to remain at current levels for a considerable time, SVRs are only going one way,” he says. If your lender has increased its SVR it is time to look to switch to a new deal.

“There is still a very good chance borrowers will find a product cheaper than the average SVR,” says Andrew Montlake from broker Coreco. “Many lenders will also throw in a free valuation and free legal fees to help keep remortgage costs down.”

The same advice applies even if you are on one of the lowest SVRs of about 4 per cent, according to Boulger.

“It could still make sense to switch now as long as you have at least 20 per cent equity,” he says. “The only ones who should sit tight are those borrowers on the old SVRs of 2.5 per cent with Nationwide or Cheltenham & Gloucester/Lloyds TSB, as these are capped at 2 per cent above the base rate for the remaining term.” For borrowers leaving SVRs because of fears over unexpected rate increases, the security of a fixed rate makes sense, according to Montlake.

At present, Skipton Building Society has a seven-year rate at 3.99 per cent, available up to 75 per cent loan-to-value (LTV). This comes with a fee of £995 and also offers a free valuation and free legal fees.

“Several other lenders have five-year fixes below 4 per cent with lower fees,” adds Boulger. “Northern Rock, for example, has a rate of 4.09 per cent with a fee of £99 available up to 70 per cent LTV, with free valuations and free legal fees.”

There is little point for most in switching to a two-year fix, as rates are only about 0.5 per cent cheaper than a five-year fix, according to Boulger. “And

HOME TRUTHS: If you’re thinking of buyin after two years there will be further costs when you come to switch again,” he says.

“For borrowers who like the security and ease of budgeting offered by a fix, five-year deals offer the best value at present. However, this is provided that there are no plans to move during that period because in the current market, it won’t be possible to ‘port’ the mortgage to a new property: if you do you will incur an early repayment charge.” As with fixed rates, term trackers generally look good value compared with the more popular two-year trackers at the moment.

“Term rates are only slightly higher than two-year trackers but most have lower early repayment charges or none at all,” says Boulger.

Hollingworth picks out a fee-free lifetime tracker from HSBC at 2.49 per cent above the base rate (giving a pay rate of 2.99 per cent), available at up to 60 per cent LTV. Many borrowers will be unable to remortgage because they have become so-called mortgage prisoners.

“This may be because they don’t have enough equity in their home or are on an interest-only deal,” says Anderson.

“Or it may be because their circumstances have changed since they took out the mortgage and they are no longer able to meet the lender’s criteria.”