Maybe rates will rise, maybe they won’t. My summer advice… Wear sunscreen

Posted by & filed under Finance, Mortgage, News Round.

graphic showing sunscreen benefitsYou may be one of the many people having to take your family break during the most expensive time of the year, due to school holidays, and because you could be finding finances a little tight after indulging in a holiday, family days out, and / or sweet treats, you may be looking for new ways to save money and to more effectively manage your cashflow. Considering the media hype in the last few weeks following comments by the Bank of England Governor about a potential increase of the BoE base rate, an obvious option would be to look at one of your biggest financial commitments, and to remortgage to take advantage of a competitive market and low rates before they ‘potentially’ rise.

With reports of the “number of re-mortgages jumping by 30% in June as borrowers locked in to new deals ahead of a rise in interest rates,” we are getting more and more enquiries from people looking to make sure they don’t ‘miss out’. Some of the media would have you believe in a ‘limited offer’ marketing mentality, which you would more normally associate with buying a sofa, or possibly even The Shopping Channel. First piece of advice, don’t panic!

The reality is that there isn’t (and certainly hasn’t been during my 15 years in the industry) a choice of only one product, or even one type of product, available to all at one price, and with an expiration date or an ‘early bird deal’ when it comes to mortgages. Lenders withdraw, launch, and replace products on a regular basis, and the pricing of those products is dictated by a number of different factors. Finding the mortgage product and lender that’s best suited to your needs should involve some careful thought, and the principal consideration is about what’s right for you. Having said all of that, now could be a great time to review your mortgage, as long as doing so fits with your own unique circumstances and requirements.

A few years ago, Baz Luhrmann had a hit with the track “Everybody’s Free (to Wear Sunscreen)” written by Tim Cox and Nigel Swanston. There’s some great (and wise) lyrics, including:

“Be careful whose advice you buy,
but be patient with those who supply it”

Without wishing to indulge in any media bashing, I don’t think that the facts are necessarily supportive of the hype. Part of our job in looking after clients is to keep abreast of market changes, and we (along with most of the industry) have been expecting and planning for some time that base rate will increase in late 2015 or early 2016. As this is the case, the products that have been designed and offered by lenders for a number of months will have included some margin to allow for BoE increase in line with that timescale, and for future predictions. The statements that Mark Carney has recently made are newsworthy, but I’m not sure that some of the accompanying comments and spin were a great use of air time or column inches.

We are getting more and more enquiries from people looking to make sure they don’t ‘miss out’ and our job is to reassure them of the facts and figures surrounding the potential effect of a UK base rate rise, and to look at how it will affect them individually. Do you know how it could affect YOU?

  • If you’re currently sitting on an old base rate tracker mortgage (possibly taken 2006-08) and paying only 0.25% or 0.5% over BoE, then the best option might be to leave alone for now.
  • Perhaps you have a fixed rate mortgage, with a 5 year benefit period, that was only taken out 2 years ago. It’s possible that a new fixed rate may offer a lower interest payment, but if you need to pay an ‘early repayment charge’ to exit the existing contract, then it could be that you may be better to stay where you are too.
  • The most obvious reason to consider change would be if you’re either (A) On a tracker that’s more than 2% above base rate, or (B) a lenders’ standard variable rate and therefore likely to be paying between 4 & 6%.
  • Recently we helped a couple that had a mortgage with interest charged at 4.3% variable rate, as well as a secured loan for home improvements charged at 12.23%, and some unsecured finance. The couple had previously been restricted from changing (or thought that they were) due to past credit troubles, and amount of equity in the property. The solution recommended (3.38%) will allow them to consolidate, and save a significant amount of interest as well as reduce monthly spending.

During this week I have been made aware of a number of lenders adjusting products, and some fixed-term products have been increasing, with an average change for 5 year fixed rates being an increase of around 0.15 – 0.2%. To put that into context, if you have a £150,000 mortgage over a term of 25 years, on a repayment basis, then a rise of those amounts would increase payments by in the region of £11.00 to £14.50 per month… I acknowledge it’s not great, but it’s also not earth shattering!

Be pro-active, rather than reactive. We have an ongoing relationship with clients, and part of the service is that we get in touch around 3 months before a product rate expires to discuss the next steps. It’s sometimes worth leaving things as they are, and in these cases we’ll timetable a future review for 6 or 12 months, but planning ahead can help you to pick your right moment.

EXAMPLE: I recently met with a family whose mortgage will be due for review in the next few months. At the time of the appointment we agreed to wait a few weeks before submitting an application, but after receiving information from the lender this week that products were to be revised, and rates increased, I contacted the client to suggest a change NOW! That piece of advice will save the client around £1,200 during the next five years, compared to the new product launched today. Monthly cost of the new mortgage will be around £87 less than the payments for the mortgage that my clients’ have owned for the last 2 years, a saving of over £5,000 during next 5 years.

In summary, plan changes, don’t panic, and seek advice from someone who understands you and your circumstances. Take your time to make the right decision, and in addition to that, and in the words of a brilliant song:

“If I could offer you only one tip for the future, sunscreen would be it.
The long-term benefits of sunscreen have been proved by scientists.
Whereas the rest of my advice has no basis more reliable,
Than my own meandering experience”


SOURCES:
Bank of England report http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2015/aug.pdf#page=4
Council of Mortgage Lenders https://www.cml.org.uk/news/press-releases/house-purchase-lending-up-slightly-in-june/

 

Think carefully before securing other debts against your home, or significantly extending the period over which debts are repaid, which could result in increased amount of total interest repaid.

Your property may be repossessed if you do not keep up payments on your mortgage.

Our advice will always be based upon an understanding of your individual needs, circumstances, and requirements. This blog is not a forum for advice, and is only intended for commentary.

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