Mortgage Mayday - What does it mean for landlords?
At the beginning of the month, thousands of standard variable rate (SVR) mortgage holders found that their monthly repayments had increased.
On 1 May a clutch of lenders hiked their rates, some by significant amounts. Halifax, for example, increased the cost of their loans by 0.49 per cent to 3.99 per cent.
The hikes did not come unannounced. There were dozens of stories in the papers warning of “May Day for mortgage borrowers” – but newspaper reports are likely to be of little comfort to those who have seen their repayments rise.
But hasn’t the base rate stayed the same?
Yes – and this has caused anger amongst borrowers. The Bank of England has kept the base rate at its record low of 0.5 per cent, yet the cost of borrowing for mortgage holders has increased.
The banks insist that the base rate only determines a relatively small proportion of the cost of a loan. The money that mortgage holders borrow is made up of other customers’ deposits, loan repayments, and money borrowed by the bank from other banks. It is this latter part that constitutes the biggest proportion of the money lent, and variations in the cost of inter-bank lending can therefore have a significant impact on the cost to the consumer.
Interbank lending is measured on a scale called the London Interbank Offered Rate or Libor. Although the Libor has fallen over the last couple of months, it rose steadily during 2011. Back in December Bank of England governor Mervyn King warned that mortgage rates would rise if the Libor continued its upward trajectory.
Should I change mortgage?
It is good practice to shop around regularly to ensure that you are still getting the best possible deal. But the May Day rise caused many borrowers to consider their options more urgently.
If you are considering switching mortgages, there are a few factors that you should consider. Many people are rushing to fix, in an attempt to lock in the low interest rates. But you should treat any mortgage decision with caution. To begin with, remember that the base rate will rise – and many analysts expect this to happen around the first quarter of 2014. A two year fix, therefore, might well mean that you end up moving to a variable rate just as the base rates jump. A five year fix may potentially be a better option – but only if you can find an affordable deal. Fixed rates have increased in recent months, particularly for those with less equity in their property.
Trackers, meanwhile, tend to be cheaper – but of course, you run the risk of ending up with significantly higher repayments when the base rate rises. Amongst the benefits of a lifetime tracker, though, is that borrowers will often not be charged an early repayment fee – making switching much easier.
You should always seek independent advice before taking a mortgage decision.