It’s something you might not think of or even know much about, but a mortgage check could take you just a few minutes and save you £1000’s with very little effort.
Interest rates hit a record low in August 2016 when they reached 0.25%. This was particularly great news for people with more debt than savings, and let’s be honest, many of us have.
2017 and 2018 saw a slight increase in rates and it looked like they would slowly continue to rise. And then 2020 happened. I don’t really need to explain much further, but rates are now down to 0.1%.
Although that’s terrible for savers, it’s great for borrowers and mortgage holders.
How interest rates impact your mortgage
Much of UK’s banking is based on the Bank of England’s official interest rates. Banks will generally borrow money from other sources and then lend to you. Of course, they need to make a profit, so will generally charge you slightly more than the official rate.
Take a look at this graph from the BBC. Go on, everybody loves a graph.
Back in the late ’70s, interest rates hit over 16%! To put that in some perspective, a £100,000 mortgage at 16% would cost you £1,359 per month. And that’s without taking into consideration the bank adding on their own profit. At 2%, that’s just £424!
This goes to show how much money you can save (or lose) with a change of interest rates. Hopefully, we won’t ever see such high rates again, but even a smallish increase could put a big dent in your pocket.
Check your mortgage. Now!
We all know (well, most of us) how much we pay each month towards our mortgage. And we might be comfortable with the repayments. But very few of us know the rate of interest we pay. Banks are forever changing their rates and deals, so you may be able to move to a better mortgage product.
Where to start
You need to find out what kind of deal you’re on. If you haven’t changed for a number of years, there’s a good chance you have the bank’s standard variable rate. That’s bad news for you as it’s almost always higher than their fixed and discounted rates.
Take a look at a recent mortgage statement. By law, these need to be sent to you once a year by your provider. This will tell you your current deal and the percentage rate. If you can’t find it, sometimes it will be listed on your online account or failing that, give them a ring. As long as it’s not busy, this should only take you a few minutes.
If you’re on a fixed or discounted rate, then great. Just make sure you take a note of when it’s due to expire so you can start looking for a new deal before your current one expires. If not, then time to leap into action.
The simple option is to contact your bank about changing your deal. If your circumstances haven’t changed drastically since your initial application and you’ve kept up-to-date with payments, this should be very simple to do.
Most banks don’t require existing customers to go through the application process again if they see them as stable customers. In fact, some will allow you to apply online, which can be as simple as checking a few boxes. Others will require you to phone them, but this shouldn’t be a long, complicated call.
How much can I realistically save?
In 2020, the average mortgage debt stood at £137,934.
Take a look at how changing deals with some of the biggest providers could reduce the payment amounts. (Prices correct January 2021 and based on LTV 60% and a payment term of 25 years.)
|Standard Variable Rate||£697 (3.59%)||£679 (3.35%)||£693 (3.54%)|
|2 Year Tracker||£544 (1.39%)||£591 (2.09%)||£564 (1.69%)|
|2 Year Fixed||£538 (1.29%)||£529 (1.14%)||£541 (1.34%)|
Using the figures above, if you switched from a Nationwide Variable Rate to their 2 Year Fixed, you would save £159 per month, or £3,816 over the 2 years.
What to look out for
One major factor you need to consider is product fees. You may face a charge if you change from one mortgage product to another, even if it’s with the same bank. Some will allow you to swap for free, whilst others can charge as much as £1,500. Whether it’s worth changing will depend a lot on this fee. Other banks may charge you legal fees too, which can be several hundred pounds.
There is no point saving yourself £40 per month on a 2 year fixed deal (£960 in total) if it’s going to cost you a £1000 fee. But if it’s going to save you several thousand, it’s a no-brainer.
Feeling more adventurous?
There is a good chance that you could find a better deal elsewhere. Banks are always trying to better each other, so if yours offered one of the best deals before, it may not be so great now.
There are several ways to find new deals.
- Check deals yourself by going online. Just like insurance and utilities, you can find mortgage rates at comparisons sites. Just bear in mind that not all banks will be listed. This is a good option if you think your mortgage application will be fairly straightforward and you will have no problem meeting affordability criteria.
- Contact a local mortgage adviser. This is an option I have used a couple of times, mainly because my wife is self-employed. Mortgage providers have different lending criteria, so although one bank may lend you £150,000 another may offer £100,000. Mortgage advisers will know the best option for you. Some advisers will charge a fee for their service (plus commission) whilst others will just take the commission as their fee. Before you start, you need to find out if your adviser works with the whole of the market (ie every lender) or just a select few. If it’s just the latter, you may be missing out on a better deal.
- Use an online mortgage broker. If you don’t know of any local advisers, or can’t be bothered to leave the house, why not do it online? Companies like Habito offer the same service as most local mortgage advisers, all from the comfort of your own home. They’re free to use and are a whole of market broker. But, with that said, there are currently several major providers they don’t work with, including HSBC, First Direct, TSB, Post Office and Tesco Bank. However, Habito claims they will still tell you their prices if they are the best option for you.
If you decide to arrange a new mortgage through Habito, use this link and we both receive £100!
So, what are you waiting for?
I realise that changing your mortgage can be a daunting prospect. I remember sitting there, completely confused when I took out my first mortgage. However, spend a bit of time looking into them and you’ll soon get to grips with it. Or get somebody else to do it for you.
And if you have some spare money, take a look to see whether it’s worth overpaying on your mortgage or investing.