With interest rates at record lows for a year now, it’s definitely time to consider whether you’ve got the best deal on your existing mortgage.
The official rate, which mortgage rates tend to track, is down about half a percentage point and the lowest variable mortgage rates are a smidgeon below 2 per cent (in annual percentage rate terms, including fees), with the average variable rate around 4.5 per cent
That means it’s time to run your finger over your home loan to make sure it hasn’t been gathering dust at a rate higher than those being given to new borrowers.
Price match
Cuts to the official Bank of England rate aren’t necessarily matched point for point by all banks and other lenders. If your lender passed on less than its rivals, there’s a better deal out there and you should go find it. Once you do, check in with your existing lender to see if they’ll match it. Chances are a quick phone call could mean you don’t actually have to make the jump to a new lender.
That said, when checking rates be on the lookout for wolves in sheep’s clothing. A loan may have an attractive advertised rate – well below 2 per cent in some cases for variable rate loans currently – but there could be conditions, such as reverting to an above-average rate after a honeymoon period. In addition, there may be above-average application and ongoing fees to consider, as on top of the advertised interest rate.
That’s why you should look at the APRC, or “average percentage rate of charge”, as an indication of the real cost of the loan. The Financial Conduct Authority requires lenders to provide this comparison rate so you can get closer to comparing apples with apples, once costs such as fees are factored in.
Make extra payments
Remember, even if you’re happy with your existing lender, you can still take the opportunity to clean up your mortgage by making extra payments.
Here’s a rough, ‘back of the envelope’ example based on the “average” variable rate loan to illustrate. Let’s say you were repaying £1870 a month against a £320,000, 25-year mortgage when the average standard variable rate was around 5 per cent last year. Let’s proceed on the basis that you’re five years into your loan.
Then the Bank of England cut the official bank rate by half a percentage point because of the impact of COVID. Your bank passes the cut on and your repayments drop by around £100 a month.
If you kept paying the higher amount of £1870 a month despite your required interest now being lower – in effect applying £100 a month in “extra repayments” – you’d save more than $15,000 in interest over the life of the loan, and pay it off around 18 months early.
Of course, mortgages don’t usually travel in such straight lines from year 1 to year 25, but it gives you an idea of the value of paying more if you can.
Play around with an “extra repayments” calculator like this one.
Check out current rates on home loans via an online comparison site like this one.
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
