Your Mortgage Lender Is Going To Rip You Off

If your fixed or discounted mortgage is coming to an end, then your rate is sure to go up. We reveal how high it could rise!

This article was first sent to Fools as part of our 'Cracking The Credit Crunch' email.

Unless you've been asleep since last summer, you've probably heard about the credit crunch.

Worldwide, banks have lost more than $100 billion on investments linked to the plunging US housing market. Thus, they have become wary of lending to each other, causing the inter-bank lending market to freeze up.

The upshot of all this is that banks aren't keen to lend to anyone -- individuals or businesses -- who isn't a first-class risk. Thus, they have been raising rates and turning away customers in droves. This trend is particularly acute in the mortgage market, where home loans are disappearing in their thousands.

Indeed, in July 2007, Fool partner Moneyfacts listed nearly 15,500 mortgages in its database. Today, this figure is under 4,300. In other words, 11,200 different home loans -- almost three-quarters (72%) of the total -- have been withdrawn. Furthermore, the mortgages which remain are getting increasingly more expensive, despite cuts to the Bank of England's base rate.*

Thus, if you have a fixed-rate or discounted-rate mortgage which is due to end in 2008, then brace yourself. Around 120,000 homeowners a month are coming off attractive rates to discover that recent deals are much more expensive. For example, two years ago, you could get a cheap two-year deal at 4.5% a year. Now, the cheapest two-year tracker available is from HSBC and has a rate of 5.85% (for a round-up of the other current best buys, read this article by my Foolish colleague Serena Cowdy). On a £150,000 mortgage, that's an extra £1,428 a year. Ouch!

And, believe it or not, that 5.85% tracker is actually quite a good deal. If, instead of remortgaging, you allow your current deal to expire, you will move onto your lender's standard variable rate (SVR). This is how all mortgage lenders eventually rip you off. Because once you are on the SVR, you could find yourself paying over 7%:

Standard variable rates for the ten largest lenders

(sorted from highest to lowest rate)

Source: Moneyfacts, 07/04/08

As you can see, Northern Rock tops our table with its SVR of 7.59% a year. This comes as no surprise, as the recently nationalised Rock is seeking to shrink its lending and encourage its borrowers to remortgage with another lender. Of the remaining big lenders, seven charge between 7.44% and 7.25% a year -- including Halifax, the Goliath of this group.

At the bottom of our table, meanwhile, lie Nationwide BS and HSBC, both of which have won a reputation for treating their existing customers fairly. Indeed, HSBC gets a pat on the back for its SVR of 6.5%, which is more than a percentage point lower than Rock's rate.

Even so, moving to any SVR from a cheap 4.5% deal will come as an almighty shock to your finances. On a £150,000 mortgage, you would pay around £3,000 a year extra. That's £1,500 more than you should be paying - and a rip-off if ever I saw one.

Hence, it makes sense to plan ahead so that you don't end up on the SVR by default when your current deal expires.

My advice would be to start looking around three to six months before your current deal ends. Approach your existing lender first to see what it can offer, then use a whole-of-market broker to search the entire universe of mortgages for you. And don't leave it to the last minute to remortgage, or your wallet/purse will suffer as a result!

* PS: The Bank of England may well cut its base rate by a quarter-point to 5% on Thursday, 10 April. If this does happen, then mortgage lenders should pass on this cut to borrowers. However, thanks to the credit crunch, many lenders may decide not to cut SVRs by the full 0.25%. Others will drag their feet before cutting rates for existing borrowers. So, don't hold out too much hope for any immediate relief!

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