Choosing the right mortgage
| by Andrea Page 06 Jul 2003 Topic: Personal Finance |
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Andrea Page guides us through the many mortgage deals currently on offer With interest rates at a 48-year low and lenders competing hard for business, the chances of choosing a dud mortgage deal in the UK appear small. But addressing the right questions could help maximise your mortgage efficiency. For example, whether to offset. Offset accounts link mortgage debt to a savings account - and with lenders like Intelligent Finance, Woolwich and Virgin's One Account, to a current account, and even credit cards and personal loans. The lender calculates interest on the balance of the savings balance(s) minus the debt balance(s). A customer with a 25-year, £150,000 repayment mortgage and a £12,000 personal loan over eight years with Intelligent Finance, would save £12,570 in interest by offsetting £8,000 in savings over the mortgage term (using current interest rates). Offsetting, like the current account mortgage, is really an extension of the older flexible mortgage concept. David Hollingworth, mortgage specialist at brokers London & Country Mortgages, says it's definitely worthwhile if you intend to use flexible features like the penalty-free overpayments, underpayments, and payment holidays which accompany offset deals, because there's an interest rate premium. For example, a borrower with a £250,000 interest-only mortgage at a typical offset rate of 4.6% per annum would need to offset around £65,700 in savings to keep up with Abbey National's two-year tracker at base rate minus 0.36%, or 3.39% annually. Ray Boulger, senior technical manager at brokers Charcol, calls offsetting a 'brilliant' concept, but one that doesn't suit everyone, because the premium on a typical variable rate offset deal (these are mostly base rate trackers) is around 1% over the best conventional two-year tracker deal. As a broad rule of thumb, borrowers need savings worth at least 25% of the loan to make it work as effectively over that period. Offsetting can also work well for people with a volatile cashflow that, over time, averages out at a similar savings-to-loan ratio, and Boulger thinks increasing competition will also widen its appeal. Mark Harris, managing director of brokers, Savills Private Finance, thinks in five years all mortgages will have an offset facility. As numerous lenders now have flexible elements across their conventional mortgage range, it may well be possible to find a good fixed, discounted or base rate tracker deal with sufficient flexibility to suit your needs. Even major players like Halifax, Woolwich and Cheltenham & Gloucester now let borrowers overpay up to 10% of the loan each year without penalty, on 'special offer' deals. 'We're starting to see more flexible fixed-rate deals now,' says David Hollingworth. Northern Rock, for example, allows unlimited penalty-free overpayments during the two-year fixed-rate period, as long as the loan isn't repaid in full. If it's flexibility you're after, with or without an offset facility, individual specifications can vary. For example, Halifax permits payment holidays as long as there are overpaid funds available, whereas Standard Life allows up to two months' payment holiday a year. Offset loans are particularly handy if you might need to access savings in future. Ray Boulger says with a conventional loan you would have to remortgage to release cash, and even with a dedicated flexible mortgage, there could be restrictions; if you're between jobs and want to take a payment holiday, some lenders ask for proof of your status before agreeing, which could cause problems. If you simply want the cheapest deal, and are willing to remortgage regularly, is now the optimum time to fix? Capital Economics expects the base rate to end this year at 3%. But Milan Khatri, senior economist at the Royal Institution of Chartered Surveyors, thinks that after a further cut it could edge up to 4%. Nor would he be surprised by a similar increase in long-term interest rates, which influence lenders' fixed-rate deals. 'Fixed rates really are exceptional value right now,' says David Hollingworth; he thinks around 3.5% per annum on a two-year fix 'is a nice secure rate for a couple of years'. In addition, lenders are unlikely to pass a full base rate cut onto other borrowers. Mark Harris says the market is already factoring in base rates at 3.25% to 3.5%, so further cuts may not impact fixed rates. The gap between fixed rates and historically cheaper discounted rates is also very tight now: Britannia's two-year fix for as little as 3.24% a year actually undercuts Alliance & Leicester's two-year discount rate of 3.29%, although Mark Harris says the bulk of two-year fixed money is between 3.5% and 3.75%. If you suspect interest rates could creep downwards, bear in mind tracker mortgages automatically move with base rate, whereas a discounted rate only moves when the lender's standard variable rate does. Some lenders, including Abbey National, Halifax and Norwich & Peterborough, are able to impose a 'collar' or floor beneath which the tracker rate won't drop, should base rate fall below 3%. Brokers tend to advise against fixing for more than five years, although Gordon Brown expressed his interest in consumers taking a much longer view in the budget. That's already possible, for instance, through Leeds & Holbeck's 25-year fixed rate at 5.39%, which does offer a get-out after five years. The danger with long-term fixes is if you should need to move, your relationship breaks down or you need more borrowing in future, you can't be sure of the lender's attitude. Taking the loan to a new property shouldn't be a problem, but you may need a larger advance, or bigger income multiples. Penalties are obviously a factor too - Alliance & Leicester's two-year fixed rate at just 1.45% a year looks rosy, but the thorn is an extended redemption penalty that slides from 6% in year two to 2% in year six. From year three to six, the standard variable rate applies. Anyone remortgaging should examine the whole cost package behind an attractive headline rate. London & Country says a borrower with a £100,000 interest-only loan on a £200,000 property, who wants a two-year fixed rate, could opt for Britannia's 3.24% per annum deal, with costs over the fixed-rate period totalling £7,604, including a £275 valuation fee and an estimated £350 legal costs. The total cost of L&C's two-year fix at 3.55%, with with free valuation and legal work, is £7,399. Looking ahead, Ray Boulger says it's significant that several lenders are looking at introducing fixed-rate offset mortgages this year, as borrowers will be able to combine the offsetting effect with the security of a known rate. He believes this will further increase competition in the offset market and make it viable for even more people. At the time of writing, Northern Rock and Charcol, with Accord Mortgages, offer this option. 'We may also see more attempts by lenders to involve other members of the family,' says David Hollingworth. Newcastle and Woolwich already let family members set up their own savings account linked to the mortgage, so parents could divert the benefit of their savings to a child without losing control of the capital.
Charcol, 0800 718191, www.charcolonline.co.uk Andrea Page is a freelance journalist writing on investment, property and lifestyle issues for a range of UK and international titles including Bloomberg Money and FT Expat magazines. | |