Highest base rate in over six years

Are you exposed to the elements?

Thousands of borrowers who have been enjoying the shelter and certainty of a short-term fixed rate mortgage will soon be exposed to the elements.

At the end of any agreed fixed or discount term, lenders typically move customers on to their standard variable rate (SVR). The five rises of the past year which have seen the base rate move to 5.75 per cent have also been reflected in most lenders' SVRs, many of which are now sitting at around 7.75 per cent.

Moving from a low fixed rate to the SVR is likely to be painful. If, for example, you have a £200,000 mortgage on which you are paying a fixed rate of 4.5 per cent and now find yourself faced with paying an SVR of 7.75 per cent, you could have to find an extra £400 each month to meet your repayments.

So it makes sense to start looking for a different deal to move onto when your current mortgage comes to an end. But even then, you will need to brace yourself, as the mortgage market has changed a lot since you took out your last home loan. Here is our checklist of five things you should bear in mind when shopping around:

Checklist - Point 1
If you plan to remortgage to another fixed rate be prepared for a steep rise in your repayments. Borrowers who took out a fixed-rate mortgage two years ago could get a deal priced at around 4.5 per cent, but even the best fixed rates are now at least 1per cent higher than that, which will add around £116 a month to a £200,000 repayment mortgage.

Two-year swap rates, on which fixed-rate deals are priced, are also around the 6.25 per cent mark which means many of the mortgages on the market have rates above 6 per cent. However, there are still some good short-term deals.

If you can afford to take a risk with rate rises, a base rate tracker could prove better value. The benefit of a tracker mortgage is that if the base rate moves downwards, you are guaranteed that the reduction in rate will be passed on.

Checklist - Point 2
The way fees on mortgages work may also have changed since you last found yourself shopping for a good deal. Due to increased competition, a number of lenders now advertise cheap headline rates but charge eye-watering arrangement fees to subsidise them.

Arrangement fees in general have shot up in the past couple of years and are now typically five times higher than they were in March 2001 when the base rate was last 5.75 per cent. According to financial analysts, Moneyfacts, the average arrangement fee for fixed-rate deals is currently £816 while many others are charged as a percentage of the loan - up to 3.5 per cent in some cases.

Your lender may let you add the arrangement fee to your mortgage, which means you won't need to find the money upfront, but you will pay interest on it. Whether you can afford to pay the fee or not, you should first work out if you might be better off looking for a mortgage with a higher rate and fewer fees.
A general rule of thumb is that for bigger mortgages, the rate is more important than the fees and for smaller loans the reverse is true.

Checklist - Point 3
Another likely change in the mortgage landscape from when you took your last deal is that we are now in an environment of rising - not falling - interest rates. The base rate has risen by a very significant 2.25 per cent since its lowest point in July 2003 when it stood at a borrower-friendly 3.5 per cent.
It's already at 5.75 per cent, and many experts are predicting at least one further rise to ensure that runaway house prices are sufficiently tamed and inflation is within healthy distance of the 2.5 per cent the target the Monetary Policy Committee (MPC) must work to.

How much you expect rates to rise will be a factor in your choice of mortgage. If you think they will peak, or at least plateau, at 6 per cent you might want to opt for a discount or tracker deal. The cheapest of these have lower rates than the cheapest fixed-rate deals on the market.

If you are concerned that rates are set to continue to rise and want to know exactly how much you are going to pay each month, you might decide that it's worth paying more in the short term to fix your rate.

Checklist - Point 4
The number of "fee-free" remortgage deals offered by lenders to take business from competitors, is dwindling, and even those that are available are often not as good as in the past. "Fee-free remortgages used to mean no valuation, legals or arrangement fee. Now it typically means no legals or valuation, while arrangement fees are still payable and can be expensive.

Without a special deal, moving lender will mean paying for a valuation and conveyancing - on top of the arrangement fee and any exit fee charged by your existing lender. If your existing lender is offering a half-decent rate you may save money staying put and switching to another of its deals.

Checklist - Point 5
One silver lining for borrowers coming to the end of mortgage deals today is that more lenders are willing to offer competitive rates to keep their existing customers. Lenders are more switched on the fact that today's borrower knows what they are doing and will switch lenders altogether if they are not getting the best deal. They also realise that it is now quicker and easier to move lenders and there are a lot more providers to choose from than there used to be.

As a result, it's always worth making your first port of call your existing lender when looking for the next best mortgage deal. Some planned negotiation and a threat to take your business elsewhere may produce some fruitful results.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Your home may be repossessed if you do not keep up repayments on your mortgage.

Article date: 07.07