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Last week the Bank of England slashed its base rate to the lowest level in its 315-year history – 1.5% - and gave some homeowners reason to celebrate – those, for example, on a Standard Variable Rate (SVR) who receive the whole cut will see their repayments cut by about £40 per month per £100,000 of the mortgage. Meanwhile, anyone in a fixed-rate deal will be spitting teeth. But is switching a good idea?
Most people are unlikely to save much by dropping an existing fixed-rate deal, says Martin Lewis at Moneysavingexpert.com. "While existing tracker rates have plummeted, the top new customer deals are more expensive at 3.5%-4%ish, usually cost a fee, and ditching your fix involves a penalty anyway." Furthermore, only those borrowing less than 75% of a home's value are likely to get the best tracker deals, and the lower your existing fixed rate, the less you're likely to save. If you have fixed at 5% or less, switching is probably not worth the cost, time or hassle.
Meanwhile, anyone in an older tracker deal or paying an SVR is probably paying less than they'd pay even with an introductory mortgage offer. But could it be worth switching from an SVR to a new fixed deal even so? asks The Daily Telegraph. For example, currently you might be mortgaged for less than, say, 70% of your home's value. But in the future that value will probably drop, meaning you'll need to re-mortgage at a higher loan to value percentage. That's less attractive to lenders, so rolling over your existing mortgage could prove expensive and difficult.
But rates aren't likely to rise in the next few months. So the Motley Fool's Neil Faulkner reckons that, even if your loan is in danger of topping the 70% loan–to-value (LTV) threshold, you don't have to rush a switch, assuming you're currently paying an SVR of around 4%. Re-mortgaging might work out cheaper at, say, a 90% LTV, but you'd start by shelling out significantly more than you're paying now. "Your SVR would have to rise extremely steeply inside the next two years for the switch to be worthwhile."
Fine, but when the LTV exceeds 90%, it's a different story, says the Daily Express' Harvey Jones, as "homeowners with little or no spare equity in their property face paying twice as much when they remortgage as those who own a larger slice of their own".
Nonetheless, a cheap SVR mortgage still looks a good deal for now. Lenders will in any case ensure most of the best fixed-term deals you might switch to expire just when they see interest rates rising again.
And anyone still thinking of ditching or switching should contact a "whole of market" mortgage broker to do the numbers first. The better ones will only charge for this if you end up using them.
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David Stevenson
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