Is your variable rate mortgage coming to an end?
There has been bad news this week for mortgage borrowers on variable rate or tracker mortgages. These up to now lucky few, who are currently paying some of the lowest interest rates in history, face a dramatic rise in repayments when their introductory deals end over the next few months.
Tracker mortgages are those whose interest rates rise and fall in line with the Bank of England’s official rate. Before the credit crisis, many borrowers took them out when they charged very small margins above Bank Rate. A small number of people were even charged a margin below Bank Rate.
Luck, however, does not last forever. Most tracker deals last for only two years before the rate reverts to the lender’s normal rate, usually called the standard variable rate (SVR), and a more realistic reflection of the lender’s costs.
Many people who took advantage of the best short-term tracker deals just before the financial crisis began two years ago are about to see their interest rates revert to much higher SVRs.
Standard variable rates are set at the discretion of the lender. In more normal times they usually rise and fall in line with the Bank of England’s rate, but in today’s disrupted markets there is huge variation.
The people whose monthly mortgage payment is about in increase naturally enough now want to know how to find another deal that keeps it low.
The best advice from experts is that people who are now paying next to nothing for their mortgage should consider either saving the windfall or overpaying their mortgage. Don’t become accustomed to the lower repayments.
Borrowers whose loans are about to revert to SVR are also advised to check when the tracker incentive comes to an end and what the follow-on rate will be. In many cases the mortgage will revert to the lender’s standard variable rate, but other deals may even revert to an ongoing tracker rate rather than the SVR.
Alliance & Leicester and Woolwich deals often move onto another tracker. These can be extremely favourable compared with the higher-margin deals of the current market.
The other key factor is the equity in the property. Those in the best position will have more than 25pc equity and be able to search for the best deals.
Those with little or no equity will have few options. They will either need to stick with their lender’s SVR, which may represent a good ongoing variable deal anyway, or, if they would like to lock into a fixed rate, they should see what deals their lender may have.
With indications from the Bank of England that rates will stay low for a while, a tracker might be a better option than a fix for those switching from a high SVR.
Whatever option borrowers decide on it should be noted that the most important advice is not to stick your head in the sand and ignore the approaching end of the original tracker deal. Acting now will avoid the stinging financial pain caused by a sharp hike in monthly repayments.
