Mortgage queries

[megah0]

I am about to buy my first house. Offer made and accepted.

I'm currently looking at mortgage options (I have an AIP). I was going to accept an offer from the halifax but an advisor working for the estate agents handling the sale says he can get me a better deal by taking out a mortgage with an initial lower rate and changing it once the fixed period ends. if I took his advice I would save around £2,000 over 2 years of this fixed term but the overall term (25 years) is a lot more expensive than the bank offer.

The initial rate is 2% lower than the offer given to me by my bank going on his advice, he says it is commonplace to take out a fixed term, then change after that term and find a better deal elsewhere.

I am sceptical, mainly as it seems too good to be true but can anyone shed any light or offer advice?

TIA

[TheAnimus]

It pays often to change.

Too many people never change their mortgage, and given the amount of money even 0.25% means mega bucks!

Now the thing is how long is the fixed period with the other one, when does it end? What do they both go to? If its just "standard variable rate" then that is no guarantee, right now my SVR is lower than the companies I'm looking to change over too, however the promotional rate is excellent, and I can jump ship at any time.

[megah0]

Halifax are offering 6.39% (I know, I know, 10% deposit though) for 3 years then SVR currently at 3.5%
The other offer is 4.59% for 2 years then the VR which is currently 4.99%

As far as repayments go that equates to £403 per month as opposed to £483 with the halifax.

A significant saving.

[jim]

The initial rate is 2% lower than the offer given to me by my bank going on his advice, he says it is commonplace to take out a fixed term, then change after that term and find a better deal elsewhere.

I'd want to know exactly when I can cancel it and move, and exactly how much I'm going to have to pay in fees/fines if I do that. If I want to leave before the term is up, what happens then?

As far as I know, that's usually the catch with those things. Having said that, they might just be relying on negligence (i.e. forgetting or not being bothered to swap provider) in which case the fees and fines might not be a problem.

[Lucio]

Personally I prefer the idea of a fixed rate mortgage, you know that for X years, you can definately afford you house assuming no changes in your income. At the end of the period, you may be lucky, you may be unlucky, depending on how the interest rates have changed.

Right now, you really should fix for as long as possible, providing you aren't planning on moving in the period simply because you know rates won't get any better than they are now, and may well get much worse once this government borrowing repayment *really* starts to bite. Already people are pushing for the BoE to raise the base rates.

[mikerr]

Also worth looking at the one account, as many people rave over that - particularly if you want to be able to vary your payments (and overpay) and finish the mortgage quicker.

[Zak33]

It pays often to change.

only if you had an average or worse mortgage to start with
in fact people who were on fixed rates (and recently were struggling cos everone else was having lower and lower rates) are often best STICKING to their current morgage after the fixed term finishes cos it drops lower than anything you can get right now! Not that the bank/bs will tell you that... all of a sudden changing you to a new mortgage is their life's work

If you change mortgages AND mortgage providers, you need to have revaluations and legal charges done again. It can cost from £400 to £1000 to get it all sorted in lots of cases."free fees" don't exist. Everyone pays somewere along the line.

Mortgage advisors for estate agents get paid for lending money and most estate agents make more out of the mortgage sales and associated insurance products than the house sale.

How do I know? I just do.

Simple way to deal with this:

Get all the figures in front of you and add them up... but I will tell you this:

ALMOST NOBODY STAYS INE THEIR FIRST HOUSE... so look to the long term... whenyou want to move, CAN YOU ESCAPE that mortgage company if it's not so good.

[Zak33]

Also worth looking at the one account, as many people rave over that - particularly if you want to be able to vary your payments (and overpay) and finish the mortgage quicker.

this.. with bells on.

Natwest do an offset one too.

[cptwhite_uk]

Here's a few points, and some basic questions you need to ask yourself:

• You are normally only tied into fixed term mortgages for the length of the fixed term only. Once this is up you're normally free to search for a better deal.
• The factors you have to consider are: How much you're borrowing, the fixed term time you're looking at and the initial set-up fees. For exmaple: £1000 set-up fees is proportionally a lot more in you're borrowing a small amount. So a higher interest rate with no set-up fees is generally a better option. The more you borrow, the more important the % rate becomes and the less important the initial fee is. You'll need to get out a calculator and figure out if you're better paying an upfront set-up fee, or accepting a higher percentage interest. Base this over the number of years the fixed term runs for. (Take the difference in monthly payment (due to the difference in % rates on the two options you're looking at) and multiply by however many months are in your fixed term contract). Also consider if you don't pay a set-up fee, that's money that's in your bank and could be earning even more interest if you want to be really thorough!
• Ignore what the variable rate is at the end of your fixed term, it's a value which has no meaning and will definitely have changed by the time the fixed term period is up, so completely irrelevant to your decision making.

You'll typically find that the longer the fixed term, the higher the interest rate the bank will be willing to offer. The option comes down to:

Shorter fixed term = small financial gain* ...or...
Longer fixed term = financial certainty + slightly higher payments

*This is a con as really there's unlikely to be any financial gains. Why? Becuase if you're re-newing your mortgage every 2 years, the more likely you're be paying £500-1000 set-up fees EVERY 2 YEARS, as opposed to every 4 or 5 years. So the small saving you make is instantly swallowed up by the fact you're coughing up a set-up fee more frequently.

I re-newed last year and got a deal with Abbey - No set-up fees, £250 towards my legal costs to help switch over, 4.99% and fixed for 5 years. Bloody good deal if you ask me. It also means no mortgage headaches for 5 years - trust me that's worth something in itself.

One final note if you're quite fortunate - most mortgage companies will allow "over payments". This means you can pay ABOVE your monthly mortgage rate to help pay off your mortgage faster - and save you more money in the long run. If you think you might be able to do this check out your mortgage offers conditions on this. They normally set a limit of no more than x% of the value outstanding in any one year. For example you still have an outstanding debt of £100,000. If the contract states you can overpay by upto 5%, you can pay you normal rates + £5000 in that year. If you go above that stipulated amount an early repayment charge normally kicks in. This is something like 3% for every £1 repaid early ABOVE that allowed £5000. So if you paid £6000 off over your normal monthly repayments, you've be charged £30 and only get £5970 taken off your mortgage.

I hope you can follow this. Re-read it till you understand it - it's the important info you need to know about mortgage boiled down into a single post

Edit: Based on the info you've given the 2% difference, and the £2000 saving over 2 years, and assuming any set-up fees are the same for more deals offered to you. The cold hard figures would suggest the lower % option is the better deal, but that's by no means certain. Looking at the fact that paying off the national debt seems to be a high priority, you have to speculate that in 2/3 years time interest rates are likely to be somewhat higher than they are now. After 2 years, if you'd taken the 3yr 6.39% deal, suddenly having that 6.39% deal for another year, knowing that if you'd taken the alternative option you'd now be looking at say 7.4% + another set-up fee. That higher rate seems a bit more appealing for the added security for an extra year, potentially lower than market rates in the 3rd year, and 1 year delayed set-up fee. Obviously this is all speculation.

What you have to remember is interest rates are still at a very low level. Banks have been pushing up their interest rates on mortgages to try and claw back all the money they've lost in the last 18-24 months due to the financial crisis. They aren't looking to do us, the tax payer who got some of them out of the ****, any favours. It's only likely to get worse, so my advise would be to shop around for a longer fixed term deal with as small a set-up fee as possible.

[Saracen]

I would offer one perspective on some of the comments above. While it's generally the case that mortgage rates follow base rates and that base rates are currently at an extremely low level and that that won't last forever (I hope), at the moment, unless you have a tracker the link between base rates ad market rates is more like a piece of elastic than a steel rod.

It is not necessarily the case that as base rates change for economic reasons, that mortgage rates will follow in the way they do under normal, historic conditions, These are not normal conditions. It's the rates banks pay for their money that are determining our mortgage rates, not the notional rate set by the BofE.

One other perspective. I'm naturally cynical about deals offered by estate agents. The estate agent I bought my last house from tried desperately to flog me every service he could, including insurance, mortgage and even a solicitor, despite being told, in that last instance, that my conveyancing solicitor was an old family friend that had been doing my families property work for 25+ years.

As far as I'm concerned, the estate agent is working for the vendor, not me, and he is NOT getting extra commission from my mortgage, etc. Each to his own, and your mileage may vary, but if you're in doubt about the Halifax being the best deal (and I'd be in doubt about that), I'd suggest finding an independent broker. Just my take on it.

[megah0]

Thanks for your comments folks

Saracen you pretty much summed up my take on the situation there, my natural level of cynicism is also fairly high, but having not been in this situation before I wasn't sure that it was me just being pig-headed :-)

[Bugbait]

Mostly very solid advise so far.

Please note that the base rate is only half the equation when it comes to the interest on your borrowing. SVR's that track the BoE base rate look very good on paper at the moment because the base rate is so low (0.5%).

Two things are important here: (1) Does the SVR or Tracker track the BoE base rate? More do these days but not all of them and this can make a world of difference, especially when it comes to expectations. If the SVR or Tracker are based on an intenal "base" rate then it can be any figure the bank decides on, regardless of the BoE base rate. I could be wrong since I haven't looked at it in a while but I don't think there's any regulation that forces tracker based rates to follow the BoE. (2) What is the fixed amount being added to the base rate? Sure, 3.5% SVR may look good now but that's tracking 3% above the base rate. If the base rate jumps to 3-4% once the 2-5 year honeymoon period is over then 6-7% looks less attractive.

To reiterate what others have mentioned, the "get out" clauses are very important. If you're realistically considering a remortgage (often can be better then initial mortgage deals) after the honeymoon period then these costs can be critical to the decision.

Overpayment options are also very important if you are in a position to do so. Any extra payments in the first 5-7 (generally) years of a 25 year mortgage can translate to significant savings in the long term. Example: I intentenionally paid myself a lot more in the first 12 months of my mortgage in order to overpay as much as possible. Given the interest rate on my mortgage of 5.89% at the time and the increasing trend the interest savings outweighed the extra tax payable. If I had made the same payments a few years into the mortage the savings would've been far less. Every extra pound you pay in the early months or years works for you (by reducing overal interest paid) for EVERY month after that, even if you stop overpayments until your mortgage is repaid.

It may be an idea to compare current remortgage deals to see if they're better than your first mortgage. Sure, you can't apply for them right now but it will give you an idea of any savings, if any you might be able to take advantage of in future. Also look a the minimum term before you can apply for a remortgage after taking out your inital. This is often 6-12 months if not less. This ties in with the above about exit costs on your current offers.

My current offset tracker was only available as a remortgage deal, available after 6 months from inital. I flipped as soon as I could and well before the 2 year honeymoon or discount period of my first mortgage lapsed. Sure, it cost £800-900 in fees to flip it but now I'm tracking at base+0.39% (0.89%), a rate not available to most initial mortgages a the time.

Finally, always use an independant mortgage broker if you can .

[Barrichello]

in fact people who were on fixed rates (and recently were struggling cos everone else was having lower and lower rates) are often best STICKING to their current morgage after the fixed term finishes cos it drops lower than anything you can get right now! Not that the bank/bs will tell you that... all of a sudden changing you to a new mortgage is their life's work

indeed - we been through getting the calls asking us to grab a new "bargain" 4.5% lol - Our 4.2% fix deal ran out about 15 months ago and reverted to a +1% BOE tracker and they wondering why we will not swap from a 1.5% rate to 4.5% hmmmm

[aeonf242]

Halifax are offering 6.39%

Is this a fixed rate, a Base Rate +5.89%, or some sort of Variable Rate....

Halifax

Did you get independent financial advice from them? I suspect not.

Ideally an Independent Financial advisor should be able to get you a better rate....

A fixed rate of c.4% for 2 years sounds quite reasonable at your LTV and in the current market

[megah0]

It is a fixed rate

The other provider that quoted (via an independant advisor) was for 4.59% variable. I'm not sure I want to expose myself to the risks inherent in that at the moment.

[aeonf242]

It is a fixed rate

The other provider that quoted (via an independant advisor) was for 4.59% variable. I'm not sure I want to expose myself to the risks inherent in that at the moment.

Personally I'd agree with you, you're unlikely to get a fixed rate for too much less as an FTB 10% deposit, however it's not impoosible that we will see bank base rates back to 4-5% ( of course SVRs might not rise to 7-8%)