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From The Sunday Times
July 8, 2007
Clare Francis
HOMEOWNERS with larger loans are losing out after last week’s rate rise as
lenders restrict their best deals to smaller mortgages.
High-street banks and building societies know customers with bigger loans are
more likely to switch at the end of a special offer, so they are limiting
their lowest rates to people borrowing less than £250,000.
However, savvy homeowners are beating the rate rise by bypassing the high
street. Many are negotiating bespoke deals with brokers, where they split
their loans between the top fixes and discounts to get the best of both
worlds. Some are even agreeing their own rate “protection” with investment
banks.
Cheshire building society, for example, has a two-year fixed rate at 5.35%,
which is the market leading deal for housebuyers. But it is available only
for loans up to £250,000. Halifax has the best two-year tracker at 0.51
points below Bank rate, or 5.24%, but the maximum loan is £500,000.
Melanie Bien at Savills Private Finance, a broker, said: “Lenders make little,
if any, profit on market-leading deals. They know those with large mortgages
are more likely to switch at the end of the fixed or discounted term, so
many restrict their best products.”
Last week’s quarter-point rise in Bank rate to 5.75% – its highest for six
years – added another £41 a month, or £500 a year, to a typical £200,000
interest-only mortgage. Borrowers were already paying an extra £167 a month,
or £2,000 a year, following four rate hikes since last August, and analysts
are warning there could be further pain ahead.
More than half of economists expect rates to hit 6% by the end of the year,
according to a poll by data company Reuters, and some warn there could be
another hike to 6.25%.
Roger Bootle, economic adviser for Deloitte, the accountant, said: “I think
there is at least one more quarter-point rise to come, after which things
are much less clear. If the housing market and consumer spending prove
resistant, rates will go higher.”
Hundreds of thousands of families with fixed-rate mortgages have been
protected from the rises so far, but more than 2m households will be coming
off fixed-rate deals in the next 18 months and face a big payment shock. The
best two-year fix in July 2005 was 4.22% from Newcastle building society.
Someone with a £200,000 interest-only mortgage would see their payments leap
from £703 a month to £923, even if they remortgaged to the current top
two-year fix at 5.54% from Stroud & Swindon.
Even borrowers who can’t get the best rates have plenty of options to beat the
rate rise.
Mix and match
Borrowers whose loans are too big to qualify for the best deals, or who cannot
decide between a fix or a discounted rate, should consider splitting their
mortgage.
Most economists think there will be another quarter-point rise, but about 40%
believe rates have now peaked. Rather than paying a premium for a fixed-rate
mortgage, therefore, many lenders will allow you to split your mortgage
between two products, so you could have part on a fix and the remainder on a
lower variable rate.
This may also allow you to get deals that would otherwise be unavailable
because of your loan size. For example, someone with a £1m mortgage could
have half on Halifax’s two-year tracker at 5.24%, and half on its two-year
fix at 5.69%. Both deals are only available up to £500,000.
You have to have both elements with the same lender, though. Halifax and
Chelten-ham & Gloucester will only charge you a single arrangement fee –
normally the higher – but some, such as Portman, will charge you fees on
both products.
Overpay
Borrowers with big savings could pay off a chunk of their mortgage to keep
their repayments the same even if their rate goes up.
Suppose you have a £200,000 interest-only loan on Newcastle’s 2005 fix at
4.22%, paying £703 a month, but are moving to a new fix at 5.54% with
repayments of £923. You would need savings of £47,000 to pay off a chunk of
the loan and keep the monthly outgoings at £703.
If you need access to your savings, go for an offset loan. Suppose you had a
£1m mortgage and £400,000 in savings. You could base your monthly payments
on the full £1m, but because of the savings you would be charged interest on
only £600,000 of the loan. You therefore overpay each month and will clear
your mortgage more quickly.
Alternatively, you could ask the lender to recalculate your repayments so they
are based on £600,000 rather than £1m. In both cases you could still access
your cash.
L&C has an exclusive offset deal from Intelligent Finance which charges
0.36 points below Bank rate for two years, or 5.39%.
Negotiate your own protection
Many super-wealthy borrowers find they cannot get fixed rates because lenders
will not take the risk on multi-million-pound loans, or they may face
exorbitant penalties to get out of a variable-rate deal. Many borrowers in
this position go direct to investment banks to organise their own
protection.
Suppose your mortgage rate is 5.75%, but you think rates will keep rising. You
could buy a three-year “swap” from an investment bank that is fixed at
6.32%, according to Stone-hage, a wealth-management firm. While rates are
below 6.32% you will have to pay the difference between that and your
variable rate– 0.57 points at present. However, if interest rates exceed
6.32%, the bank would pay you.
Take out a multi-currency loan
Interest rates are lower in some countries – 0.5% in Japan and 2.5% in
Switzerland. But if sterling weakens against the currency in which you
borrow, your debt will go up. If your loan is in euros, say, but you make
repayments in sterling you can hedge against fluctuations by taking out a
forward contract to fix the exchange rate for up to two years.
Alternatively, multi-currency mortgages are offered by debt-management firms
such as ECU Group. They shift your mortgage into currencies expected to
weaken against the pound so that the value of your loan, when converted back
into sterling, goes down.
Earn 15% on your savings
SAVERS are being offered the best deals for six years: you can now earn more
than 6% with no catches, or up to 15% with restrictions, writes David
Budworth.
Icesave was one of the swiftest to react to last week’s rate hike, announcing
it will go up by the full quarter point to 6.2%, but not until Friday.
Sainsbury’s will up the rate on its internet account by 0.25 points to 6.25%
on August 1.
Many big names, including ING, have been slow to act. The suspicion is that
they will sneak out paltry rises in a few weeks’ time.
Which banks offer the highest rates?
Alliance & Leicester is offering 15% before tax for a year, but there are
big catches. Monthly savings are limited to £250 – £3,000 a year. The
account is only open to those taking out a new mortgage with the bank. A&L
has some good home-loan deals, but is not always the best. At the end of 12
months, your money goes into the bank’s Instant Access account paying only
1% on £3,000.
Abbey’s Super Monthly Saver pays 10% before tax but is only open to those who
have other bank products. Savings are limited to £250 a month.
When it comes to Isas, National Savings & Investments (NS&I) has the
best rate at 6.3% but it does not accept transfers.
What’s the best deal on larger balances?
Tesco offers a market-leading 6.5% before tax on £50,000 to £99,999, although
you get less on lower tiers. This will go up by the full quarter point to
6.75%, but not until August 15. The rate includes a bonus of one percentage
point that runs for only six months, after which it will fall to 5.75%
assuming Bank rate stays the same.
Cahoot pays 6.35% on balances of £500,000 to £1m, including a 0.6% bonus which
lasts until December 1.
And away from the banks?
NS&I’s index-linked certificates pay a return above the retail prices
index and the interest is tax free. The three-year scheme pays the
equivalent of 9.41% to higher-rate taxpayers. You can invest £15,000 in each
issue.
Higher-rate payers should also consider guaranteed income bonds, which pay a
fixed income over a set term.
Baronworth offers a two-year annual-income Gib from Pinnacle that pays 5.65%
on £1m. The headline rate for Gibs takes account of a deduction for
basic-rate tax of 20%. The 5.65% interest is therefore equivalent to a gross
rate of 7.53% for higher-rate taxpayers.
You have to pay an extra 20% if you are in the higher band but can delay this
until the end of the term.
What does the rate rise mean for annuities?
Annuity rates have been nudging up since the start of the year, when a
65-year-old man with a £100,000 pension fund could have bought a standard
joint-life annuity paying an annual income of £6,064. Today, the best policy
from Scottish Equitable would pay £6,476 – £412 a year more.
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