Remortgaging – making a decision in a world of flux

The other morning I read that record numbers of homeowners are taking out fixed-rate mortgage deals as the threat of another interest rate hike hangs over the heads of homeowners like the sword of Damocles. According to the Council of Mortgage Lenders (CML), around three-quarters of home movers in recent weeks have fixed their monthly mortgage payments in an attempt to protect them from the next rate increase.

At a time when the market can apparently predict with some accuracy when the next rate rise will occur (notwithstanding January's hike, which took most people by surprise), fixed-rate deals are pretty attractive as far as options go. Basically, mortgage lenders assess where rates will go over the next months and so fixed rates rise or fall as a consequence of their calculations. The thing to remember is that the longer the term agreed to, the higher the rate will be.

But this begs the question, what if rates don't go up again? And even if they do, will it matter if lenders have already factored in the possibility? Although the CML says the average interest rate of a fixed-rate loan went up from 5.23 to 5.27 per cent in January, the Sunday Times has found that two-year rates dropped in February, with several deals now below five per cent. This suggests that the current borrowing cycle is close to peaking, if it hasn't already. And while these low rates may seem attractive, some believe that variable rates are better value.

In fact, home loans expert Ray Boulger from mortgage broker John Charcol has said that it is now too late for households to protect themselves against further rate hikes, partly because lenders have had the foresight to include another base rate increase in their deals. He also believes that borrowers could be better off going for a variable-rate mortgage, especially if rates have reached their peak and take a downward turn in the near future.

While variable deals involve lenders setting their own rates, which can rise or fall in accordance with the changes made to the base rate by the central bank, these kind of mortgages come in a range of guises, such as a tracker, capped or discounted, which may add to the confusion. The good thing about remortgaging to a variable rate is that you might get lucky and see the interest rate drop, but on the other hand you might be unlucky and see the interest rate rise. On the other hand, the advantage of remortgaging to a fixed-rate is that the homeowner knows exactly what will happen, although if interest rates drop, they will end up paying more than they might have done if they'd gone for the variable deal. And round and round it goes.

This leaves homeowners with something or a dilemma. They know they should probably remortgage but are at a loss when it comes to making a more concrete decision. Part of the problem is that the world of personal finance is riddled with contradictions and competing narratives. In the end, it means that homeowners have to base their decision on something other than macroeconomics and take a more personal outlook.

Personal judgements (which can be just as valid as those of professional analysts who are themselves merely making educated guesses) must play a part in any decision. Only the individual knows whether he or she will be able to meet repayments in six or 12 months' time. And only the individual knows whether his or her job is stable or if they are contemplating moving house when the kids go to uni. Other homeowners may simply want to play it safe or take a risk, depending on their personality and level of disposable income.

But help is at hand, of sorts, for those who seek it. Entering 'variable or fixed' into Google throws up an innumerable number of websites all clamouring to offer a lamp to the weary homeowner who walks in the valley of darkness where other lost homeowners have trod before. Some of these guides are trying to sell or broker mortgages through their website, which can be useful, although they're obviously in the market to sell a service or product. Price comparison sites are also helpful because they tend to be impartial.

While there is no easy way to make a decision regarding the type of mortgage, a judgment has to be made (even if it the decision to is to do nothing). Like everything in life, remortgaging is a risk and solutions aren't always perfect; nor does reaching a verdict preclude the fact that another type of mortgage may have been the better option after all. In the end, homeowners need to take a chance because there are very few guarantees. But as Voltaire once said: "Doubt is not a pleasant condition, but certainty is absurd."

Author: Richard Mather

Consumers and banks in battle over mortgage exit fees

One of the main bugbears of consumer groups in recent times has been the perception that banks and other lenders are ripping off customers at every given opportunity, a belief that is often grounded in reality. As newspapers continue to report of small battles taking place between consumers and banks over the issue of overdraft penalties and other punitive fees, there is evidence to suggest that mortgage exit fees could be the next campaign of war.

Mortgage exit fees, which used to be a way of covering the cost of paperwork, have grown into an industry, with lenders charging anywhere between £150 and £500. What's worse is that they are applied when a mortgage has run its course, not just when the homeowner decides to remortgage with a cheaper provider. Another irritant can be the fact that exit fees can be raised after the mortgage has been taken out, essentially making the mortgage more expensive.

It means that homeowners who took out a mortgage some years ago and now want to remortgage are being whacked by exorbitant costs, undoubtedly designed to stop people refinancing their loan. Some pundits have described the habit of switching deals on a frequent basis as 'rate-tarting', which apart from being an unfortunate turn of phrase, seems to suggest that finding a better rate with another provider is disloyal or even abnormal. This begs the question, why would anyone want to stay loyal these days when banks seem intent on attracting new customers at the expense of old ones?

I recently read an article in the Yorkshire Post by Jim Spowart, who was the creator of Intelligent Finance at Standard Life Bank, who reckons that the big banks don't place any value on mutual loyalty anymore. Interestingly, he expressed his belief that there are two types of borrower in Britain now – those who are 'rate tarts' and regularly shop around for new mortgage deal and those who "are sitting on their hands, facing stiffer fees, extra charges and higher interest rates" out of a misplaced sense of loyalty.

The upshot is that banks no longer care so neither should customers. And although this is likely to lead to a more comprehensive breakdown in industry-consumer relations, it only seems right that homeowners exercise a bit of common sense and follow the money. This is likely to happen anyway as most experts believe one or two interest rate hikes are still on the cards for this year. At the same time, there is no shortage of personal finance websites urging homeowners to seek out the best mortgage deals before they get pulled by the lenders. Of course, remortgaging is sometimes about consolidating credit card debts onto a mortgage at a low rate of interest – something that is likely to grow in popularity as more and more people struggle with unsecured credit repayments.

Returning to the problem of mortgage exit fees, the Financial Services Authority (FSA) has been looking into the issue since 2005 and it has taken until now for mortgage lenders to do anything about it. Basically, the FSA has said that lenders have to reduce charges now and justify why fees should be raised at all – and since the new rules apply historically, households are now in a position to avenge their grievances. In fact, they have inundated personal finance website Moneysavingexpert with inquires of how to download templates of fee refund letters. A minority of lending institutions have already slashed their fees, which means they are now in line with the FSA's requirements. All of which is good news for ordinary folk with bills to pay.

While it looks like consumers will win the battle over exit fees and recoup some of their money, they might not win the war, as mortgage firms are bound to offset losses somewhere else. Nonetheless, no one expects banks or consumers to slink away from conflict and it could well be that mortgages with high arrangement fees and artificially low introductory interest rates – described by the Liberal Democrats last week as a "trick" – will be the arena for some future fight.

Author: Richard Mather