Craig is joined by mortgage broker Marty Naan to discuss rising interest rates.
What’s the latest on interest rate rises?
A couple of weeks ago, interest rates rose to 1% – the fourth time they have increased this year. In the last few months we’ve moved from 0.25% up to 1%, which may not sound that much. But when you apply these percentages to people’s monthly bills, it can be a staggering amount.
When it comes to interest, nothing changes for you in terms of your property or what you get from your mortgage. But you’re suddenly paying four times more interest than before.
Who does the interest rate rise affect?
There are a lot of mortgage clients out there that won’t be affected today because they’re on a fixed rate. They know what they’re paying and when their expiry date is, and those people are protected – they know their payment is not going to change.
But you have to apply a long term thought process to this. When does your fixed rate expire? What’s going to happen with interest rates at that time? We can’t predict where interest rates can go, but if they have been going up and continue to go up, how is that going to affect you in the future?
If your fixed rate is not ending for three years or so, there’s not much to worry about. But if it is coming to an end in 2022, you need to be looking at it right now.
What are my options on a fixed rate deal?
This situation can be worrying – we don’t know what’s going to happen in five years, three years, two years…
We know that not everybody has the same passion we have for making sure you’re on the right deal. A lot of clients tend to leave it alone. But if my fixed rate was expiring within the next year, I would have a conversation with an expert to figure out my options.
You can start that at any time. You don’t have to do anything until six months before expiry, but it’s worth considering what interest rates might be in 12 months and whether you could potentially secure a better deal now. You might have to pay a fee, but is it worth it for longer term security?
A five year fixed rate deal might be worth the fee right now. Let an experienced mortgage advisor figure it out and give you the options.
Should I act now if it’s six months until my mortgage expires?
Absolutely – and there’s a bonus to doing this. You can arrange a mortgage today and it’s valid for six months. You’ll have it locked in – you have your offer documents and six months of freedom. If an interest rate happens to go down, you can still act on that.
We can easily make a change to benefit from a rate reduction. But if the interest rate happens to go up, you’re protected. You have a lender’s offer stating it will lend you an amount of money on a set interest rate. So you can lock things in well in advance and cover all bases.
What if you’re on a variable rate mortgage?
If you’re on a discounted rate or a tracker, interest rises have a more immediate impact. Your mortgage payment could change within days and your next monthly payment will probably be higher.
If you’re in this situation you should reach out to a broker for a chat. We need to help you, as this can be worrying for you.
Generally the best thing to do on a tracker or discounted mortgage is either to stay with it, especially if what’s happening in the market is unpredictable, or move to a fixed deal. But the only way to decide is by speaking to an expert.
Somebody on a tracker could be on it for a particular reason. Maybe they like the flexible overpayments option. They don’t want to be constrained by a 10% overpayment limit. But have there been changes to tracker rates that mean you could be in a better position? The only way to know that is to review your mortgage – which costs nothing.
What is the standard variable rate or SVR?
SVR is the Voldermort of the mortgage industry. It’s the bane of my existence as a broker. At the end of your fixed rate term, a tracker or discounted rate term, your lender will put you on a standard variable rate, which is typically higher than any other rate they have.
They will contact you once to say on a certain date, your current rate is expiring. They can set the new rate at whatever they want at any time. They don’t have to link it to the base rate so it can go up and it can go down. You’re at the lender’s mercy.
A recent client’s rate was just under 5%, which is crazy. I got them a new deal at around 2.5%. The customer had been on that standard variable rate for six years. I want to save people money. It’s as simple as that.
Why do people stay on the SVR?
People can be indifferent about doing something about it. The clients I just mentioned didn’t think they could do any better, because they had never asked.
They were worried about their financial position and having specific documents. People also worry that their house isn’t worth what they think it is, even though they haven’t had a valuation in 15 years. People worry about unnecessary things and they do nothing. They bury their heads in the sand, which is the sad part.
It may be that they had a bad experience when they took their mortgage out – perhaps they didn’t appreciate how complex the application process can be. And the idea of talking to a broker can be quite daunting – as if you’re handing over your life to somebody you don’t know.
There are also people out there that don’t know that you can change your mortgage. They think it’s like an insurance product. You get a 10% discount when you sign up, but then after that your premium goes up. We need to do something about that. People switch energy, insurance and phone contracts – but switching mortgages can save you thousands of pounds.
What if you’ve been declined for a remortgage before?
House prices have been rising fast over the last two and a half years and have increased by 10% this year so far. So people that couldn’t remortgage to get off the SVR two or three years ago could quite possibly get a great deal now.
You can review because your house price has gone up. Your circumstances might have changed. You owe less on the mortgage. A lot of things will have changed, so people need to be reviewing their mortgage annually, ideally. Certainly if they’re on the SVR, they need to be constantly looking for an opportunity to get off it. You’re wasting money. You’re giving away money that you could be doing something with.
What does it cost to review your mortgage?
It will just cost you 90 minutes, once a year or once every two years. People spend hours on comparison websites to save a pound on their mobile phone bill. But sparing an hour once a year could save you hundreds.
When you sit down and look at your outgoings every month, number one for most people is the mortgage. So it’s something you have to review.
It’s an easy process. As a broker it doesn’t matter to me what mortgage you choose, what your term is, how much you want to pay. I just want to make sure that you do what’s right for you. I have no loyalty to any particular lender or interest rate. But when we have a conversation, your loyalties and your preferences will come out and we will find something that suits you and, fingers crossed, will be better than what you’re on today.
What should you do when you get a letter from your mortgage provider saying that your deal is ending?
The options are generally to remortgage or do a product transfer, which is where you stay with your existing lender.
Generally, three months before the expiry of an existing interest rate, your lender will write to you to tell you that your rate is coming to an end. They may give you a list of options and probably ask you to get in touch so that they can arrange something better for you.
But a product transfer might not be the best thing for you. There are so many lenders out there. A broker will look at the offer from your current lender and compare it with the rest of the market. If it does look best to stay with your existing lender, we’ll do it for you and there will be no fee from us.
That gives you peace of mind. You’ve sat down with somebody who can explain the difference in monthly payments over the next 10 or 20 years. We show you what it’s going to save you in interest based on your specific circumstances.
Is a product transfer easier than a remortgage?
A product transfer is easier, it’s largely a paperwork job. It’s potentially a lot simpler than doing a full remortgage application. But how do you know if there are better options out there for you than that product transfer?
You have to look at other lenders and see what’s the most suitable deal. And the best way to look at lots of different lenders at one time is to go through a mortgage advisor who can do all that for you.
Imagine you want to review your mortgage and you went through 60 lenders’ websites one by one. It will take you months!
Then imagine the luxury of finding somebody that will do this for you. You sit back and watch whatever’s new on Netflix and let somebody else do the work. All you have to do is make sure that you’re comfortable with everything and that it suits what you want to do. Then we’ll move forward with it, whether it’s a product transfer or a remortgage.
What are your predictions about interest rates?
There’s a lot more to come, potentially, from interest rates. The market is going to fluctuate, so it’s interesting to see where it’s going to go. It’s a good time to be a broker because it’s a real opportunity to help people save money. It’s going to be an interesting few months.
As the market moves, it’s even more important to regularly review your mortgage. That way you know you’re on the most suitable deal for you.