IAN and Eileen, pictured with their daughter Aimee, have a £65,000 tracker repayment mortgage with Nationwide. The rate is 4.9 per cent but the deal runs out this month and will jump to the standard variable rate. They would like to pay off their mortgage in the next 15 years. Their house is worth £200,000 and they are making monthly payments of £50 into an endowment policy. They can afford repayments of £700.
David Hollingworth, of London & Country Mortgages, says: Ian and Eileen are in a great position and will have the pick of the market when their present deal ends. It is a good idea to think ahead rather than react once the mortgage reverts to a lender’s standard variable rate. The Nationwide variable rate has been increased to 6.24 per cent in response to the recent Bank of England base rate quarter-point rise. While lower than many lenders, it is higher than competitive deals available.
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When considering alternative products it is important to take into account switching costs — arrangement fees, valuation fees and legal costs to set up the new deal as well as an exit charge. These fees can take a massive chunk out of the savings made through securing a lower interest rate. On a mortgage of this size it will definitely be a good idea to look at products that will cover at least some of the set-up costs, and there are plenty of deals offering free valuation and legal work as incentives.
It is important to see what the existing lender can offer and Nationwide will offer the same deals to all its borrowers. It has a two-year tracker at 4.62 per cent with a reservation fee of £499, or a rate of 5.02 per cent with no reservation fee. It also offers a range of fixed rates if Ian and Eileen feel that they would rather guard against future rate rises. The two-year fixes start at 5.09 per cent with a reservation fee.
A lifetime tracker could be worth considering as it does mean that they will have good long-term value and will not have to switch every two or three years. Woolwich is offering a tracker at 0.19 per cent above base rate with no arrangement fee, free valuation and free legal work for remortgages. There are no early repayment charges at any time.
Ian and Eileen can afford to cut their term dramatically in light of their £700-a-month budget. They could even cut it to ten years and be within this figure, although the variable rate could increase. Another option to keep some flexibility would be to maintain a slightly longer term than ten years and make overpayments, rather than be tied to higher payments each and every month. Nationwide allows penalty-free overpayments of up to £500 a month, and the Woolwich deal carries no penalties at any time.
London & Country, 0800 373300
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Richard Perry, of Savills Private Finance, says: I suggest Ian and Eileen continue to make their endowment payments so that they have a substantial lump sum once the policy comes to an end. They should assess the value of the fund on a six-month basis or once a year to ensure that it is performing to expected levels; if it isn’t they may need to address this but should seek advice before taking action. Keeping this policy will enable the couple to repay a sizeable chunk of their mortgage upon completion or leave them with a lump sum to invest.
They should switch the Nationwide mortgage because the rate will increase significantly from September. Trackers are good value at the moment: Savills Private Finance has a product that is 0.2 per cent under bank base rate, giving a payable rate of 4.55 per cent, with free legal and valuation fees. That would cost £500 a month on a £65,000 repayment mortgage with a 15-year term. This is well below their limit of £700 a month, so they could consider reducing the term further still. If they are happy with the 15-year term, they could place the extra £200 a month in a savings account, making regular overpayments to reduce their mortgage balance. Alternatively, they could invest the surplus cash for their children’s education.
When it comes to switching to another mortgage, they should have no problems in terms of income multiples. Most lenders will ask Ian for two years of accounts, but in his case there should be be no issues at all.
Savills Private Finance, 0870 9007762
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