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Personal finance - Changing home loans and lenders

Swapping a fixed-rate mortgage for a variable one or vice versa is a fraught decision.

GPs paying high rates of interest are likely to be considering if they would be better off with a different mortgage and, maybe, another lender too. Make the wrong decision though, and you could find your mortgage is even more expensive.

Swings and roundabouts
With the Bank of England base rate still at an all time low of 0.5 per cent when we went to press, should you try to fix your mortgage at a good rate for 10 years or more?

Also, some people tied in to higher fixed rates of around 6 per cent are wondering if they should pay the lender's early repayment charge (ERC) to escape. Then they could either go on to the same lender's standard variable rate (SVR) - of which many are currently around 3 to 4 per cent - or take on a lower fixed rate with another lender perhaps.

Act fast or miss out
Although lenders reluctantly passed some rate cuts to borrowers earlier this year, that has changed dramatically in the past few weeks as fears of inflation return. By mid-July many lenders had started to increase their rates, despite the base rate remaining so very low.

Unfortunately most have huge losses to recoup.

Though it feels terribly unfair, lenders are benefiting from demand for mortgages outweighing supply.

If you have tried to hire a gondola in Venice, you know exactly what 'price fixing' is. How lenders are behaving at at the moment is not dissimilar.

As soon as one starts to increase its rates, the rest follow.

Potential savings
If you are considering paying your ERC and negotiating a lower rate deal, working out if you will save money comes down to straightforward number-crunching.

With, say, 12 months left on a fixed rate and an ERC of £2,000, you can start looking for a new rate on which you will save more than £2,000 over that period.

However, on some larger mortgages the ERC penalty can be tens of thousands - too much for a new deal to cover.

Where your low fixed rate has already expired and the interest has reverted to the lender's low SVR, do not procrastinate.

With rates now going up, it might be difficult to secure a good fixed deal in a few months' time.

Although it looks as if the base rate may remain low for the next year, any complacency may be misplaced.

When the Bank of England starts to increase its base rate again, lenders' rates may go up fast and catch you out.

There are advantages and disadvantages involved with fixing mortgage rates for periods longer than two or three years so get expert advice.

And remember, you risk losing your home if you do not keep up your mortgage payments.

LONGER TERM FIXED RATES

- If you have sizeable equity in your property and can get a very low rate (3.99% for 10 years, say) you should save a huge amount longer term.

- Most people choose fixed rates to for peace of mind and security over the medium to longer term.

AGAINST

- Lack of flexibility is the main drawback. Although five to 10-year fixed rate mortgages can be portable, if you move to a larger property and need to borrow more, your lender may be reluctant to increase your mortgage.

- Personal circumstances may change. What if you move overseas or get divorced? Paying off the debt early could mean a large ERC.

Credit crunch and mortgages

Negative impact
Stricter lending criteria so harder to secure a mortgage and other credit; higher interest charged.

Fewer best buys
Many mortgage deals were withdrawn from the market, so less choice for borrowers. Arrangement fees have increased, and the number of mortgages approved have dropped dramatically.

Bigger deposits
GPs with at least 25 per cent as a deposit or with 25 per cent equity in their home can negotiate a good rate. Those with a lower deposit to put down, such as an 80 per cent-plus loan-to-valuation ratio, are sometimes faced with extremely high rates.

Tracker mortgages
Loans where the interest rate is the Bank of England base rate plus a margin. Currently, margins are easily 3.5 per cent or more above the Bank's rate. If this starts to increase, then settles again at 5 per cent, you could end up paying 8.5 per cent or more - a serious consideration.

Buy to let
Lower house prices can be an excellent opportunity for would-be GP landlords, but buy- to-let mortgage lenders have tightened their belts. Where a 15 per cent deposit would once have been adequate, you now need at least 20 per cent. Lenders value conservatively so may value the buy-to-let property at less than the asking price.

Silver lining
This could be the Rent-A-Room scheme. You can earn up to £4,250 per year tax free in rental income if you take in a lodger provided you live in the property. Find out more at www.direct.gov.uk.

Liz Willis is a financial adviser at the medical division, St James's Place Partnership; www.lizwillis.co.uk or 07900 654401

 

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