Don't despair if you're a homeowner; check out these ways to help beat the rate rise.
So the widely expected interest rate rise was announced today. This has raised rates to their highest level since 2001 and unsurprisingly, many of us are starting to feel the pinch.
Indeed the Council of Mortgage Lenders (CML) reckons that this latest rise will add an extra £16 per month, on average, to a £100k variable rate mortgage, and £23 per month to a £150k home loan. Indeed, since August last year, monthly payments on a £100k home loan could have risen by nearly £64.
So what can we do to protect ourselves? Well, here are a few things to try:
1. If you're paying your lender's Standard Variable Rate (SVR), switch!
If your mortgage deal has run out, you will no doubt be currently paying your lender's SVR. This is one of the most expensive ways to borrow so get your skates on and start looking for a cheap deal to remortgage to, straight away.
2. If you don't like surprises, fix..
The obvious solution to rising interest rates is to fix that mortgage rate -- you'll know how much you'll be paying for a set amount of time and so be shielded from potential interest rate rises (though of course, on the other hand should rates drop, you won't benefit). With many analysts hinting at more than one rate rise, fixing that mortgage can be a very sensible idea. Indeed, according to the CML, 78% of borrowers chose a fixed rate mortgage in March.
Checking with our very own Motley Fool Mortgage Service, I have found the best deals include a 2-year fixed rate deal from Bradford & Bingley at 4.99% (£1,299 fee) and a 5-year fixed rate at 5.23% from Giraffe with a £999 fee.
3. If you have Savings, why not Offset that Mortgage?
With rising inflation, it can be almost impossible for taxpayers to make money on a variable rate savings account, especially if they pay higher rate tax. Even stashing money into the high-paying savings account (at, say, 5.7% AER) would mean a higher rate taxpayer would only be earning 3.42% after tax (and a basic rate taxpayer 4.56%).
One solution can be to instead stash that cash in an offset mortgage savings account instead.
Rather than keeping your cash in a savings account (which is taxable), by linking it to your mortgage the cash can work to reduce your debt. As most modern mortgages calculate interest on a daily basis, every pound will work to reduce the interest payable on your largest debt, no matter how short a period of time it is in there. And whilst the money is used to reduce your mortgage debt during the time it is in the account, it can still be withdrawn at any point -- just like traditional savings.
Looking at an example:
If you were to move £10k of savings into an offset mortgage account (and you had a £100k mortgage at 6%) it would have the effect of reducing your mortgage debt to £90k. Interest would then only be charged on the £90k portion. If you were to leave that cash in there for a year, it would have saved you £600 in mortgage interest.
Compare this to keeping the cash in a savings account:
£10k in a savings account paying 5.7% AER earns a higher rate taxpayer £342, and a basic rate taxpayer £456.
£10k in a mortgage charging 6% APR -- saves £600 in mortgage interest.
Or to look at it another way, this means that your money would effectively be earning tax free interest at your mortgage rate (in this case 6%) which, let's face it would be pretty hard to beat with a traditional, taxed savings account!
4. Go even further with a Current Account Mortgage...
Finally, you can go even further with this concept and look at Current Account Mortgages (CAM). As well as factoring your savings into your mortgage debt, these accounts also add in your current account balance. So however much you have in your current account works to reduce your debt too. And on a different note, as your mortgage is one of the cheapest ways to borrow, by rolling any expensive debt into it you could reduce the interest payable here, too.
Say you had £5,000 on a credit card charging 13% APR, a £5,000 personal loan for your car charging 8%APR, and a £100,000 mortgage at 6% APR. By rolling the loan and card debt into your mortgage you could pay 6% APR on it all -- and save a small fortune in extra interest.
Both Offset and CAM mortgages take full advantage of the fact that most modern mortgages calculate interest on a daily, rather than annual basis -- meaning that even those few days that the bulk of your salary stays in your account will still be helping to reduce the interest payable on that mortgage debt!
Finally, you should obviously check with your lender that you can remortgage without penalty, before attempting to do so. But if you can, check out all of your options and do your sums carefully.
Remember, the smaller the mortgage you need, the more impact the arrangement fee will have (you may find you'll pay less in the long run by choosing a higher rate with a smaller fee). Finally, if you have savings, speak to your lender about adding an offset facility to your account -- most offer this option which can help shave even more money from your loan.
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