Looking for a cheap fixed-rate mortgage deal? You could be in luck. ING Direct has launched a mortgage that allows home owners to fix the interest rate they pay at 3.69% for the next five years. That is incredibly cheap – probably the cheapest on record in Britain. So should you take them up on it?
Our instinctive answer is yes. But it isn’t entirely straightforward. Why? Because rates have been falling across the board. The average rate for a two-year fixed-rate 75% mortgage is now 3.72%, while tracker rates have dropped to an average of 3.5%. These are low, but still not as low as the rates most people are currently paying on their lender’s standard variable rate (SVR). For example, SVR-paying customers of Cheltenham & Gloucester and Nationwide Building Society are enjoying an interest rate of 2.5%. Anyone who is on the tracker deal at the Woolwich must be feeling particularly smug: they’re paying a mere 1.49%.
If you are on one of these great deals, you won’t want to rush into a fix. Instead, do a stress test. Work out what your monthly repayments would be if interest rates went up by 1% or by 2%. Could you still afford them? If not, then it’s worth thinking about fixing at these levels. However, if you are now – or are ever – going to need to make a new mortgage application, you will need to spend some time preparing for it.
The financial watchdog, the Financial Services Authority (FSA), is planning to bring out strict new lending rules – but even in advance of their implementation, most lenders have already got tough on borrowers. You can’t wander into a bank, give a rough idea of your income and walk out with a cheque anymore. Instead, your credit report will be studied under a microscope, your earnings triple-checked and your general ability to manage your own finances assessed. That means you need to take the time to turn yourself into the ideal mortgage candidate.
First of all, get hold of your credit report and check it to make sure there aren’t any mistakes on it. If there are, then contact the credit agency and the company that the error is connected to and get it corrected. Then have a look to see if there are any genuine black marks on your file. If you have missed the odd bill payment here or there, make sure you don’t do it again.
Next, consider whether you can afford to overpay your mortgage. The more you can shrink the size of your overall loan the better your chances of getting a good deal when you go to remortgage. Contact your lender and ask how much you are allowed to overpay by each month. Some will limit it to 10% of your monthly repayment, for example. Others will not. If there is no limit, consider using some savings to reduce your loan. Just make sure you still have some savings left for emergencies: once you’ve used cash to pay down your mortgage, not many lenders are going to let you borrow it back again.