Mortgage Interest Rate Cuts: Spend The Savings Or Repay Early?
We’ve been talking a lot recently about the good news for some variable rate borrowers as the government urges all lenders to pass on the interest cuts. Some banks have passed on the decrease in rates at least in part to their borrowers and the government is continuing to press all banks to follow suit. There are caveats, however, as the collapse of house prices has also led to a decrease in the equity held in property particularly if it was purchased in the last five years and some variable rate mortgages have collars which preclude the borrower from benefiting from interest rate cuts below a certain level.
What then is the best strategy for everyone in these uncertain times? There is some merit in continuing to pay the same amount as one paid before the rate cut and thus increasing the equity an owner has in the house. According to figures from mortgage brokers London & Chelsea published in The Times today, maintaining payments at the same level over the next two years, on a mortgage of £200,000 with a rate cut of 3%, maintaining payments at their current levels could increase the equity by 4%.
The higher the deposit put down on a house, the better the mortgage deal. According to Moneyfacts, the financial-data firm, the Halifax has 64 different mortgage deals available for those people lucky enough to have a deposit of 25% or more but only 16 deals for those with smaller deposits. For borrowers who prefer fixed rate deals, the average 2 year fixed rate is 4.98% for borrowers with 40% equity compared to a fixed rate of 5.27% for those with only 25%.
So don’t spend perceived mortgage savings this Christmas, keep up your existing payments and reduce future payments or the term of your loan.