Will your mortgage be as safe as houses if interest rates go up?

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This is an important warning for anyone with a mortgage, or who is about to get one. 

Home loan interest rates have dropped in the last month, but pundits predict the UK base rate will rise early next year – so it’s crucial to check now whether your deal is right and if you can save money.

And this isn’t trivial cash, for most mortgage holders it’s their single biggest expenditure, which means cutting the rate can be your single biggest saving. Just a one per cent point cut in interest on a £150,000 repayment mortgage will typically slash your outlay by £85 month. 

For many, with a decent deposit or equity in their home rates are close to last year’s all time historic lows. The likes of Nationwide, Lloyds, Virgin and Santander have cut rates recently, some by as much as 0.7 percentage points. So here’s how to check.

Benchmark the best rate using comparisons. While in general I’m a fan of using a decent mortgage broker, it’s important to understand that most brokers only search all the deals available to them.There are two types of mortgages that are missing. Most importantly are direct only deals, commonly offered by HSBC and First Direct. In other words you can only get them if you go direct to the provider not through a broker. Then there are also the rare ‘broker exclusives’ which of course only the broker offering it can tell you about.

Therefore I’d always start my search by using a comparison site that includes both broker deals and direct only deals to get a benchmark of the type of thing you’re looking for. These include {http://www.google.co.uk mortgages| google.co.uk mortgages|link} {http://www.moneysupermarket.com mortgages| moneysupermarket.com mortgages|link} and my own mse.me/mortgagebestbuys – in that I’ve added fixed mortgages to combat one of my pet peeves about mortgage comparisons. While they usually list deals by the interest rate, the fees can make a massive difference, so we’ve got a ‘total cost comparison’, showing the total fees plus interest you’ll pay over the fix or discount period. 

The rate you get depends on how much of your house’s value you’re borrowing. Your loan-to-value (LTV) describes how much of the house’s value you’re borrowing eg, a £10,000 deposit on a £100,000 home is 90 per cent LTV. A lower LTV means a better deal.

For those looking to remortgage (which means getting a new deal for the same house) it’s important to understand it is your house’s value at the point you get the new mortgage that counts. So if your house has increased in value then it’s likely your LTV has improved. If it’s dropped, it’s got worse.

Most important to understand is that there are key LTV thresholds of 90 per cent, 75 per cent and 60 per cent, where the rates get far cheaper. For example the cheapest 2 year fix for someone with a 9 per cent deposit is 4.79 per cent and yet with a 10 per cetn deposit it drops to 3.54 per cent - that’s £104.47 a month less on a £150,000 mortgage. So it’s worth pushing hard if you can to make the next threshold.

Finding just £100 more can boost your chances. Many people push themselves just to the next threshold, yet even then it’s best to go just a little bit more. So if you’re applying for a 75 per cent LTV mortgage on a £100,000 home, don’t borrow £75,000, go for £74,900. While it won’t make it cheaper, I’m told the fact you’re not on the brink can speed up the underwriting process as it doesn’t look to lenders like you’re at your limit.

Boost your chances of getting a top deal. Finding a top deal is the easy bit, getting accepted is tough. Credit scoring plays a big role in acceptability, you need to manage your credit-worthiness, preferably a long time before application. And new mortgage rules launched this year mean you need to prove you can afford the mortgage even if rates rise. See www.mse.me/boostmortgage.

Overpaying £150/month can save £28,000 in interest. If you’ve spare cash and your mortgage allows you to overpay it can be hugely lucrative.

Overpaying a £100,000 5 per cent interest mortgage by £150/mth saves £28,000 in interest alone and means you’re mortgage free 8 years earlier (on a 25 year term).  Do your own calculation at www.mse.me/mortgagecalculator

 Yet don’t just jump at it there are three things you need to check first:
 1) Ensure you check there are no penalties for overpaying on your mortgage – if there are it’s generally not worth it. 
2) If you’ve a historic tracker mortgage at a very low rate mortgage – less than the top saving rate roughly 1.5 per cent- then it’s likely to be better to save than to pay off your mortgage until rates rise. 
3) Always keep a cash emergency fund aside of a few months’ worth of bills.  As if you overpay but then lose your job, don’t expect the mortgage company to say “no problems you’re already in credit” – it’ll still count it as arrears. 

Help to Buy 2 is irrelevant in your choice. While much hyped, the main Help to Buy scheme (ie, not the original one only for new builds) is about the Government giving lenders, not you, a guarantee to help them offer more 95 per cent LTV mortgages. 

So its main effect is there are more 5 per cent deposit mortgages available – though they’re not that cheap (if you can I’d push to get to a 10 per cent deposit where rates really drop). If that’s what you’re looking for, it makes no difference to you whether it’s a Help to Buy or not. Go for the best deal.

Mortgage brokers can make it easier and faster. Just going to your existing bank or building society means you’ll only be offered its products - but mortgage brokers look at most deals across the market.

As well as helping those who are unsure of what they’re doing, a good broker can quickly source a relevant product that fits your credit history (info not usually available to individuals) and ease acceptance on otherwise unobtainable mortgages. Just make sure you ask them how much you’ll be charged (some phone only brokers are fees free – they just get a commission) and ensure they look at ‘all mortgages available to brokers’.   To find a local broker near you use www.unbiased.co.uk.