In the summer of 2005, hundreds of thousands of people – a total of around 20% of the mortgage market – remortgaged to take out two-year, fixed-rate deals. This was absolutely the right thing to do at the time, but it has come with a nasty sting in its tail. Then, fixes were on rates of as low as 4.25%, but as they end, unless they quickly remortgage, borrowers are going to find themselves paying the current average standard variable rate – more like 7.40%. And even if they do look for a new deal in a hurry, they’re likely to find that the best ones are still close to 6% and that they come with arrangement fees of up to £1,000 each. The result, says The Sunday Telegraph, is that “a million homeowners face a looming crisis” as their monthly bills leap by 40%. Looking to refinance a £400,000 interest-only mortgage? Your payments are about to go up from £1,400 a month to £2,000.
This is bound to make for much misery, but the whole thing will feel all the worse now that house prices aren’t rising in most of the country any more, says Ian Cowie in The Daily Telegraph. Soaring prices made supporting huge mortgages “seem effortless”, but now it just seems “a long way down”.
So what can you do to mitigate the cost of your loan? If you think rates will keep going up, you’d be wise to go for another fixed-rate deal. A slew of depressing inflation numbers has meant the better deals have already been taken off the market. But The Sunday Times points to Scarborough Building Society, which has a two-year fix at 4.98% and Britannia B, which has a five-year fix at 5.64%. Both offer ‘free’ legal and valuation work, but make up for it with very high fees – £1,495 and £399 respectively. The former can be “added to the loan so you don’t have to pay it upfront”, but note that this will turn out to be a false economy: pay 4.98% on £1,495 for 20 years and your total bill will come to £2,364.
Otherwise, you might want to think about cutting the size of your mortgage. Can you pay a lump sum in? Can you up your monthly payments? Or might you even move house? I’ve been looking at house prices in London and concluded that if I was going to buy a house here (which I’m probably not…), I’d buy in Fulham, which appears to offer an odd oasis of value in a mad world.
Thanks to the fact that it takes double the time to get into the City from Fulham as it does from the likes of Shepherds Bush, you can still buy a four-bedroom house for £850,000. So why not sell up in Notting Hill and move to Parson’s Green? That’ll cut your mortgage payments. Better still, if (or should I say when?) something goes wrong in the City, having not gone up so fast, the value of your new house may not fall as quickly as that of your old one.
Love is Not Enough: The Smart Woman’s Guide to Making (and Keeping) Money by Merryn Somerset Webb is now available from Harper Collins, £12.99.