Escape the Election turmoil – by voting for a five-year home loan

MORTGAGE borrowers anxious about the political turmoil ahead – whoever wins the General Election – should consider taking control of their biggest financial outgoing while the going is good.

Banks are falling over themselves to offer cheap home loans – with big brands such as HSBC, Barclays and Santander leading the pack with bargain rates.

David Hollingworth, of broker London and Country, says: ‘The good news is that the market is very competitive as the banks have plenty of money sloshing around. They are really going for it with keen rates.’

Five-year fixed rates have become particularly popular with borrowers because these will carry them through potential turbulence in the medium term – whatever the colour of the next government or the impact of Brexit.

But another reason to ‘take five’ is that these deals also look good value even compared to two-year deals. The difference between the rate on a typical five-year fix and a two-year offer has been shrinking.

One of the best two-year deals costs 1.21 per cent, for borrowers with 40 per cent equity to put towards the loan, whereas its five-year equivalent is 1.49 per cent.

Hollingworth says: ‘That’s a crazily attractive price for a fiveyear rate.’

He suggests there is no point hanging around to wait for cheaper deals to come along. ‘You may trim a few more basis points off by waiting but you could end up paying more in repayments if you end up on your lender’s standard variable rate,’ he says.

With one of the best two-year deals in our table (from Santander), a borrower with a £150,000 repayment mortgage – and 40 per cent equity – could save £254 in monthly repayments by switching from a typical 4.5 per cent variable rate.

Pick the best five-year option (also from Santander) with the same 40 per cent equity and the saving would be £235 a month – just £19 extra. One pitfall of taking a two-year deal instead of a five-year alternative is that it won’t feel that long before you have to start looking for a new loan again – and face the prospect of paying yet another mortgage arrangement fee.

It can also take up to three months to do all the legal work involved in setting up a new loan.

Meanwhile, if you don’t remortgage quickly enough you risk ending up on your lender’s standard variable rate and facing sharply higher monthly repayments.

With five-year fixed rates you can relax for longer – even though you will be paying that bit more each month.

One drawback of a five-year arrangement is if you want to move home during the period, there could be issues with transferring the mortgage to a different property – even if the loan is described as ‘portable’.

Borrowers wanting to avoid upfront extras when choosing a loan can look for a deal with no fees attached though the mortgage rate – and therefore your monthly repayments – may be higher.

Although most lenders will charge fixed rate borrowers a penalty if they pay off the loan before the deal has ended, they usually allow overpayments of up to 10 per cent of the value of the loan each year without penalty.

If you manage to chip away at capital over the fixed rate period this means you should have a greater choice of competitive deals when you come to remortgage as you will hopefully have more equity to play with.

Borrowers should always check for any catches behind competitive headline rates.

Some banks are offering eyecatching deals as low as 1 per cent. But these may be targeted at homebuyers only, rather than those who simply want to remortgage.

For example, Halifax is offering a two-year fixed rate at 1.05 per cent for those purchasing a property. But borrowers have to stump up a hefty 40 per cent deposit – and pay a £1,499 fee.

Homebuyers can even grab a rate as low as 0.98 per cent from Halifax – but this is a variable rate tracker deal that will automatically rise (or fall) in line with any changes to the Bank of England base rate.

To get this rate borrowers also require a 40 per cent downpayment – and pay a fee of £999.