Each week this January, our Money Saving Expert Martin Lewis will be doing a money masterclass – showing you how to slice the costs of some of the major spending areas.
Today, as it’s one of the biggest bills you pay, he’s kicking off with mortgages, and the fact it’s the biggest bill out there means it’s possibly the biggest area you can save on too.
Before we start, is it worth even bothering to do this with Brexit coming – won’t that affect interest rates?
The one thing that is certain about Brexit is the uncertainty. And you have to embrace that and factor it in. The problem is not only is the nature of Brexit itself uncertain, but even if we knew what was happening its impact on interest rates is uncertain.
Usually when an economy declines – as the Bank of England predicts it will - interest rates are cut, so people will save less and spend more, stimulating the economy. But if the pound drops due to Brexit, it'll cost more to buy things from abroad, which will push up inflation, meaning interest rates go up to squash demand, so prices fall. Of course if Brexit boosts the economy, as others predict then the reverse can happen.
So for those with mortgages, I would forget the predictions. The rates of new mortgages are still pretty close to historic lows right now, so you should still check and see if you can save by switching now. Especially if you’re on your lender’s standard variable rate (SVR) - the default rate most fixes and trackers revert to when the intro deal ends - then the savings can be huge.
For example someone moving a £150,000 mortgage with a 75% LTV from 4% SVR to a two-year fix at 1.54% - which is the type of thing out there (Cheapest 5 years are around 1.94%) will save £4,000+ over two years even after fees. And over the years the saving can be huge, as Karen found: "I moved from a SVR to a fix. By keeping my monthly payments the same, I knocked 9 years off the mortgage term, saving £54,000. Thanks."
What do you do to find your cheapest deal?
1)Check what your mortgage costs - and is it about to end?
Dig out the details of your existing deal, and see if it's worth remortgaging (ie, switching to save). You’ll need to know…
a) What's the rate? Plus monthly payments & outstanding debt. b) What type is it? Fix, tracker, discount, SVR. c) When's the intro deal over? Eg, when does the 2yr fix end exactly? d) How long's the full mortgage term? When must it be fully repaid? Eg, in 10, 15, 25 years. e) Will I be penalised? Any early repayment/exit penalties?
Critically, work out your current loan to value (LTV) - the proportion of your property's CURRENT value you're borrowing. Eg, £90k on a £100k property is 90% LTV. For each 5% your LTV drops, usually until 60%, the cheaper the deal. So if your home's increased in value since you got your mortgage, you may gain.
2)Benchmark your cheapest deal with a mortgage comparison
For an easy benchmark of what’s available in your circumstances, start with a comparison site that includes all deals, including ‘direct only’, those that aren’t offered by broker. These include Martin’s ‘Mortgage Comparison’ or sites such asMoneyFacts.co.uk.
Don’t just focus on rate though, the smaller your mortgage, the bigger the impact of fees. A good way to compare mortgages is to divide the fee across the discount or fixed period. So a £1,200 fee on a two-year (ie, 24-month) deal is £50 a month – then add that to the monthly repayment. For smaller mortgages it’s worth checking if your existing mortgage provider has a cheaper deal; as it may have no fees for shifting to it.
3)What counts these days though, is will you be accepted.
In the good/bad old days of easy credit lenders would fling out deals to all and sundry are long gone, getting accepted is now the challenge. There are two key elements to this...
Is your credit score good enough? Your credit history is a huge part of whether you'll be accepted for any type of credit, including a mortgage. So be careful before applying not to make too many applications for other credit, and never miss a repayment.Are the repayments affordable? For the past couple of years, lenders won’t just check if you can afford the monthly repayments at the current rate, but they’ll also stress test affordability if rates were 6% or 7%. And crucially this doesn’t only apply for new mortgages, it’s also for remortgages too (which is ridiculous and on a side note I’ve been campaigning against this, and last week the regulator, the FCA agreed to consult on changing its lending rules to help free 140,000 ‘mortgage prisoners’). So it’s really important you reel in your spending months before applying, as lenders will want evidence of income, big bills, expenses and even eating out.To help match your characteristics to which mortgages are available is something a good mortgage broker can do that you can’t do yourself. But do ask if the broker will check all deals available to them and not just a panel of lenders. Also, check how much using a broker will cost and ensure you use a qualified one. For face-to-face help ask friends for local broker recommendation or use Unbiased orVouchedFor to find one, there are fee free brokers (they take a commission from the lender) available on the phone such as London & Country Mortgages.
4)Fix or variable rate?
The advantage of a fix is you get price and budgeting certainty that the rate won't move for a set time. Whereas variable deals move with the UK interest rate (and sometimes just at the provider's whim). Generally you pay a little more to fix, but not much. Ask yourself how much you think rates will rise over the period. If safety's what is important for you, err on the side of fixing, and fixing for longer – and right now with fixed deals being outrageously cheap, and there being a lot of uncertainty out there, this is a good time to look at it. And if you can get a long fix for not much more than a short one, that also gives you a level of certainty.