Duncan Farmer looks at the options for borrowers whose fixed rate deals are coming to an end.
This year about half a million homeowners will have to remortgage as the two-year fixed-rate deal they took out at the beginning of 2016 comes to an end. The alternative is that their lender simply transfers their loan to its standard variable rate, which, unless they have a very small mortgage, will be expensive.
The good news is that for the moment at least, fixed-rate mortgages are now cheaper than they were back in 2016. In January of that year the average two-year fix came with an interest rate of 2.56 percent. Today the average is 2.33 per cent. For those prepared to shop around there are cheaper deals to be had. Sainsbury’s Bank, for example, has a range of two-year fixes with rates starting from 1.24 percent for a borrower with at least 25 per cent equity in their home.
Santander is advertising an even lower rate – 1.09 per cent – for borrowers with at least 35 per cent equity. In spite of a sluggish market recently, property prices in London have risen on average by about ten per cent since the start of 2016, so most borrowers will have built a fair bit of extra equity and therefore most likely to qualify for the best deals.
On a £300,000 loan at 2.56 percent, the monthly repayments would be £1,355, but at 1.24 percent they fall to £1,164, a saving of just under £200 a month. If the money that a borrower saved was then used to overpay the outstanding loan – most lenders allow overpayments of up to ten per cent of the outstanding capital – they could repay mortgage more than four years early and save total interest of £8,500.
The other advantage of making overpayments is that when the fixed-rate deal ends the amount you need to borrow on your next loan has fallen and so you could qualify for better rates and, almost as important, lower fees. The Sainsbury’s deal comes with a charge of £745, but Yorkshire’s fee is £250 lower at £495.
And if you have got used to making overpayments and rates have risen by the time you need to remortgage again you are at least cushioned by the blow.