8 Jul 2016
Author: Stephen Breen
The long term effects of the Referendum result will not be clear for some time. Borrowers considering taking a new mortgage – either for a new home or for their existing property – may be wondering which deal would best suit them with the uncertainty that lies ahead.
Should I sit tight?
There are some very attractive deals available to borrowers at the moment, but some experts think it’s worth biding your time. Rates may fall further over the next few weeks, particularly if the Bank rate is cut.
Moneyfacts expert Rachel Springall believes interest rates are likely to drop even lower because of a fall in swap rates, and because lenders are likely to come up with better deals to attract more borrowers. Homebuyers may be concerned about committing to a mortgage because of the recent events, so lenders are likely to offer better deals than ever going forward.
However, predicting what will happen long term is difficult. While rates may fall further, it is unclear whether they will stay low for a long period of time.
Should I choose fixed or variable?
With a possible drop in the Bank rate over the next couple of weeks, tracker rates are looking very attractive. These are charged at a percentage over the Bank rate, so a drop means the payments will go down. However, it’s possible that interest rates may also go up in the future.
A long term fixed deal can offer more certainty and security than a tracker deal. 5 year or 10 year deals are very cheap at the moment – with interest rates as low as 1.99%. It would be difficult to beat this with a tracker, even if the Bank rate does fall.
It’s also worth knowing that trackers sometimes have conditions in the small print which put in place a floor beyond which rates will not be able to fall.
What can I expect as a first time buyer?
Exceptionally low mortgage rates aren’t out of reach for first time buyers. Your Move and Reeds Rains have reported that for May, the average interest rate secured by a first time buyer was just 3.08%, a record low.
While some buyers may feel hesitant in the midst of uncertainty, industry experts predict most will not want to wait out the two years to see what happens with Brexit before moving. The increasingly cheap deals are likely to further sway them towards a buy.
Should I pay off my mortgage?
If you can pay off your mortgage more quickly than the scheduled payments require, mortgage expert Mark Harris from SPF Private Clients suggests that you should. However, he notes that you should give priority to more expensive debt first, such as credit cards with higher interest rates.
He also suggests that you leave a buffer of about six months’ cash before applying money to your mortgage. This offers some protection in case you lose your job over the coming months.
Mark also recommends taking out unemployment insurance to cover expenses in case you are made redundant.
Has Brexit changed regulation?
At present, the mortgage industry is regulated by the FCA which produces strict guidelines that lenders must comply with. The EU also imposes rules on the market. In March, the Mortgage Credit Directive came into effect which meant that affordability checks had to be carried out on borrowers, even if they were coming from another lender. The Directive further required that all applicants were assessed for creditworthiness.
EU legislation still applies for now and will continue to apply until Britain invokes Article 50. However, even when this happens, the process of leaving the EU will take two years and during that time, we will still be subject to EU law.
Once the process of leaving the EU is complete, the removal of the Mortgage Credit Directive would be good news for the industry and for older borrowers. This group can find it difficult to obtain a mortgage because of their age and perceived earning capacity.
Should I switch now?
If you’ve still got a number of years left to run on your mortgage, you might be wondering whether a switch could be safer. Some mortgages offer the ability to switch without penalty – others charge a break fee which can be several thousands of pounds. If you have the ability to switch without paying a penalty, locking in a low fixed rate deal could be a good option. This gives you the security for 5 or 10 years that your payments will stay the same, even if interest rates do rise.
Offers right now:
The HSBC launched a fixed rate of 0.99% for two years on 21st June. This has a £1,499 product fee and can only be used for LTV up to 65%. This also allows borrowers to repay up to 10% of the balance each year without incurring a charge.
The HSBC also have a five year fixed deal for 1.99% with a £1,499 fee. Alternatively Virgin Money offers a 2.44% fiver year deal without a fee.
For ten year deals, look to Leeds Building Society who offer a 2.89% fixed rate for a £1,499 fee – again, with a maximum 65% LTV. This means you’ll need a 35% deposit if you’re buying another property.
Tracker rates are competitive too – with Santander offering a 1.39% 2 year deal (0.89% over the Bank’s base rate). The fee for this deal is £995 and a maximum of 60% LTV applies.