Mortgage borrowers are being urged to Brexit-proof their finances as the term of this summer’s newly reduced fixed rate deals almost exactly matches the likely length of our two-year negotiations to leave the European Union.
Two-year fixed rate deals began to attract a huge amount of interest when HSBC broke the 1 per cent barrier in June by launching the lowest mortgage rate yet – the 0.99 per cent deal on offer to anyone with at least a 35 per cent deposit or 35 per cent equity in their home.
Since then the Bank of England’s decision to cut base rate to 0.25 per cent has seen a surge of other low rate, two-year deals hit the market.
At least half a dozen rival lenders – including Co-operative Bank, Yorkshire Building Society and Barclays – now have two-year deals set below the 1.25 per cent mark.
Sandy Ameer-Beg, principal of West Midlands-based broker Acclaimed Mortgage Consultancy, says: ‘These are eye-catching rates, but while the right two-year fix might suit many borrowers they can have drawbacks, especially in the post-Brexit world.’
Aaron Strutt, of London-based broker Trinity Financial, agrees that people picking two-year deals should realise they will be remortgaging in potentially turbulent times in the second half of 2018 or the start of 2019.
He says: ‘The low rate deals can save some people a lot of money each month but you need a strategy so you don’t lose out when the fix ends.’
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HOW THIS IS MONEY CAN HELP
Here are the four key steps to a Brexit-proof mortgage. The strategy works for first-time buyers, home-movers and remortgage customers alike.
1. Do not be blinded by rock bottom two-year rates in all the adverts while ignoring other alternatives. Ameer-Beg says five-year fixes can offer more security and help borrowers ride out the run-up to – and the aftermath of – the country’s exit from the EU.
If you have a decent deposit or plenty of equity then the likes of HSBC and First Direct have fixes lasting until 2021 and set at just under 2 per cent. Building societies Chelsea and Coventry both have deals set only a little higher.
First-time buyers or those with low, five per cent deposits can currently get five-year fixes set at around 4.3 per cent from Tesco Bank and building societies Chelsea, Norwich & Peterborough and Yorkshire.
2. Do not ignore the effect of mortgage fees irrespective of how long your fix is set to last. The lowest rate deals carry hefty set-up costs – you will pay as much as £1,499 with HSBC, for example, while several lenders have removed free valuations and legal work on their lowest rate remortgage deals.
The true cost mortgage calculator’ on our sister website This Is Money helps you compare the total cost of different loan deals over their terms so you can see if high fees and other costs are worth paying.
In general, anyone with a mortgage over £100,000 can benefit by paying big fees in return for a low interest rate. People with smaller mortgages tend to be better off choosing low fee or no fee mortgages even if the interest rate is higher.
3. If your monthly payments are going to be much lower on a shorter term fix then try to put some of your savings aside so you have money to fall back on when the deal ends. Saving £50 a month over a two-year period can help pay remortgage fees when the deal ends. Financial advisers also recommend using the money you save on monthly interest bills to reduce the capital on your mortgage, either by paying in a lump sum when you remortgage, or by overpaying each month as you go along.
The smaller your mortgage is compared to the value of your home – the more equity you have in your property – the better mortgage rate you will get.
Cutting a slice off your mortgage balance early can also help you avoid negative equity – where your mortgage is worth more than your home – if house prices fall during the Brexit period.
4. If you think your circumstances might change during your fix then ask extra questions before choosing a lender. If you think your job may relocate then Trinity Financial’s Strutt recommends checking a lender’s ‘permission to let’ policy to see if you can rent out your home if required. Terms and conditions on this vary widely.
If you fear you might lose your job or plan to become self-employed then longer term deals can be a better bet so you are not remortgaging immediately after a financial upheaval.
We’ve swapped high rents for a low mortgage
A rock-bottom two-year fixed rate loan from Halifax was the best deal for first-time buyers Amanda Pinkney and Paul Peck, who have just moved into a brand new two-bedroom flat on Crest Nicholson’s Mitchams Park development in Cambridge.
They paid £395,000 for a large two-bedroom apartment on the city centre site of the old Cambridge City Football Club ground. As a nod to its roots, the development has a planted ‘players’ tunnel’ to link its two pitch-shaped communal gardens.
Having paid expensive rents for high maintenance homes in the past, the couple hope to save plenty of money over the next two years through low mortgage repayments and reduced household bills. Amanda, a 29-year-old scientist, says: ‘The flat is sustainably built with water saving taps, underfloor heating and smart energy systems.’
Business consultant Paul, 31, also saves money by being able to walk to the station for his 50-minute commute to London.
If the couple use savings to reduce their mortgage balance in 2018 they should qualify for an even better remortgage rate. Halifax borrowers with 5 per cent equity can get two-year fixes from 3.94 per cent today. Borrowers who can stretch to 10 per cent equity get similar Halifax fixes from just 2.94 per cent.
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