Top tips for mortgage borrowers

With borrowers nervously awaiting the monthly interest rate decision on Thursday, to see whether rates will rise and their monthly payments will rocket, unbiased.co.uk's mortgage advisers give their top tips to help homeowners to prepare ahead of the news.  In the current climate the mortgage market is already leaving many borrowers confused about the right approach to take and the real options open to them.

Ray Boulger, John Charcol

"The two extreme views on interest rates are for the bank rate to stay at 0.5% for many more months and then only rise slowly for at least 5 years or for the bank rate to shoot up to 8% by the end of 2012.

"Some people always prefer a fixed rate, in which case the key decision is how long to fix for. I suggest those trying to decide between a fixed or variable rate should look at fixed rates for at least five years and both trackers and discount rates. In either of the two interest rate scenarios outlined above a two year fix will prove poor value in most cases. In the first scenario a variable rate will be cheaper over the two years and in the second scenario one would come off the fixed rate when rates are much higher and hence either be stuck on a much higher variable rate or only be able to fix at a much higher rate.

"The differentials between a market leading tracker and a five year fixed rate at the same LTV are in the region of 2% and so for a five year fix to work out cheaper than a variable rate Bank Rate would have to average more than 2.5% over the next five years. Other considerations will obviously also apply, such as whether one is happy to be locked into early repayment charges for five years. There are currently mortgage deals available such as a 5.14% offset deal. There are some slightly cheaper ten year rates but having an offset facility over such a long period is very valuable, as it effectively allows unlimited overpayments, with the facility to re-borrow those funds at will at the mortgage rate over the whole ten years, thus providing exceptional flexibility for managing cash flow very efficiently."

David Hollingworth, London & Country Mortgages

"With many expecting interest rates to remain low for some time to come a tracker rate would seem the obvious choice to capitalise on the cheapest rates.  However, borrowers need to consider how well they will cope with future rate hikes and the consequent increase in mortgage payments.  Many will dislike the uncertainty and be eyeing the cheap fixed rates on offer to give medium to longer term protection.   Either way, borrowers could also consider overpaying whilst rates are low in order to cut their debt more quickly and improve their position for when rates do begin to lift."

Bob Riach, Riach Independent Financial Advisers

"It's been some time since the Bank of England cut its bank rate to its lowest level yet. Many mortgage borrowers have seen their monthly repayments reduced substantially. Things will not stay this way for ever though. If the predictions of economists are borne out, people with variable rate mortgages could see a big rise in their repayments within a year or two. I believe rates will probably go up before the end of the year, but not by much. I believe it will rise to 1% by the end of 2010.  Obviously, any borrowers on a tracker mortgage would see their interest rate rise in line with any base rate increase. If rates go up and incomes do not, some people are going to be under pressure. Very low borrowing rates have helped to cushion some customers from the effects of the recession. We could see arrears and repossessions getting worse. Borrowers should move to a new fixed rate deal if they think variable mortgage rates will rise in due course."

Mark Dampier, Hargreaves Lansdown

"Interest rates are unlikely to rise over the next year and when they do rise it won't be by much, a good tracker mortgage would fit the bill but with the ability to change to a fix later. Fixed rate mortgages should fall further given the bond rally we have seen, I think the five year fix is the area I would look at if they fell further. Interest rates will stay on hold on Thursday."

James Carter, Independent James

"With Nationwide reporting house prices falling for the second month in a row and budget cuts yet to hit, I would be amazed if rates started to rise as with fragile consumer confidence, any rise would have a disproportionate effect on spending. It may not be a bad thing for first time buyers, so long as the rates they can obtain don't increase ridiculously; which I doubt they would.  It may have a depressing affect on the housing market as disposable income falls, more properties come onto the market and if they have a deposit saved, may provide a buying opportunity. I can't see much of a case for rate rises.  The inflation figures are distorted by the effect or tax rises and with unemployment to increase next year I see no case for a rise well into next year."

Dan Clayden, Clayden Associates

"I think that interest rates are likely to remain unchanged for the moment, but there's one thing that is for certain ... when they do change there's only one way they can go - and it's not down! That's because interest rates are currently running at a historic low - before the credit crunch the Bank of England base rate was around 5.5% whereas now it's 0.5%. While many will think that fixing at a low rate makes sense, it's not always as straightforward as that. This is because fixed rates are typically higher than variable or tracker rates and so if rates don't go up before the end of your fixed rate you might end up paying over the odds. Also you need to look at the mortgage ‘deal' as a whole and not just the headline rate. It's easy to be tempted by a low rate, but you should also take into account the arrangement, valuation or legal fees that may need to be paid as well. It has also become more common for the best rates not to pay any commission to your broker and so you might also need to factor in the cost of taking advice when comparing rates. So my top tip would be to seek advice from a whole of market mortgage advice who can recommend the most suitable mortgage type and rate to meet you circumstances, while taking all of the above factors into account."

Jane King, Ash-Ridge private finance

"If homeowners are thinking of changing their mortgage they should check to ensure there are no redemption penalties for changing.  They should ask their current lender for their best deals before looking to move as often this will avoid valuation and legal fees.   Homeowners should take into consideration any future plans for moving house, further borrowing etc before deciding on the right time.  If they are planning to move from employed to self-employment in the near future then it may be appropriate to look at the mortgage first as changing will be difficult for the newly self-employed.

"I think the interest rates will remain at 0.5%.  Although this may not be good news for savers and pensioners many homeowners who are just about managing financially may be pushed over the edge if rates rise.  I cannot see the Bank of England risking the prospect of mass repossessions and debt write offs as a reasonable trade off for increasing rates. 

"I believe interest rates will not begin to rise until early 2011 and then this may not be sustainable in the short term. A flat market shows that there is no real appetite for borrowing with many choosing to pay down debt instead.   Homeowners should look to fix for 2 - 3 years if fixed rates become attractive although again added fees could negate any savings.  Independent Advice is essential."

Karen Barrett, chief executive of Unbiased.co.uk

"As the monthly interest rate decision approaches many home owners and first time buyers have been left worrying about the effects. Should the committee opt to increase interest rates, homeowners may find that pressure on their finances increases as their monthly mortgage repayments rise. Therefore it is important for borrowers to be prepared and understand the consequences of such decisions. Seeking advice from a qualified and whole of market mortgage adviser will provide you with the information and help you need. Visit Unbiased.co.uk's ‘find a mortgage adviser' search to find an adviser."