The past 18 months have been pretty grim for those in need of a new mortgage. Not only has the number of products on the market collapsed, but interest rates have failed to move down with the UK base rate. Note that back in October 2008 the Bank of England base rate was 5% and the cheapest five-year, fixed-rate mortgage was 5.49% – a tiny difference of 0.49%. Yet in October this year, with the base rate at just 0.5%, the cheapest five-year fixed-rate deal was a whopping 4.99%. The banks – who have an explanation for everything – tell us that this is not their fault: they price mortgages not off base rates but off swap rates (basically the rate at which banks themselves borrow). But swap rates, says Martin Lewis in The Daily Telegraph, are currently around 2.1% – far below the average mortgage rate.
However, there is some good news – the number of products on the market is edging up, the average mortgage rate is under 5% and there are some deals around that close the gap between the swap rate and your rate. First Direct deserves a round of applause for its new offset mortgage. Offsets differ from standard mortgages in that any savings you have are held in an account linked to your mortgage. You don’t earn any interest on the money in your savings account, but it is set against the money you owe on your mortgage overall. This works very well for anyone with savings – such as the self-employed, who need to retain cash for tax payments. Say, for example, that you have a £100,000 mortgage and £25,000 in savings. You’ll only pay interest on £75,000 of your mortgage. But should you withdraw £10,000 from your savings account then you’ll start paying interest on £85,000 of your mortgage.
In the past, offsets have had limited appeal, thanks to the fact that they tended to come with slightly higher interest rates than other mortgages. But First Direct’s lifetime tracker is very competitive. It charges a mere 2.58% (although there is an arrangement fee of £999) and, crucially, there is no early redemption charge. So if a better deal appears you can remortgage at any time without penalty. The only barrier to applying is that the minimum deposit is 35%. But if you’ve got that, this may well be the mortgage for you, says Kate Murphy of MoneySupermarket.com.
Finally, remember that if you aren’t ready to remortgage just yet but don’t want to miss out on a good deal then you can pay a fee to reserve a mortgage rate to start in three to six months’ time. So you could reserve a fixed deal, then when the time comes take the deal if it’s still competitive or leave it and only lose the reservation fee, says Lewis.
So if you are sitting on your bank’s standard variable rate or your fixed term is ending soon, start shopping around. Some of last month’s best buys have already disappeared: these days if you want a good deal you need to move fast.