Homeowners with trackers face shock rise

Hundreds of thousands of homeowners with super-low trackers face a payment shock of as much as £7,000 a year in the next two months — even as the Bank of England indicated last week that interest rates could remain at lows for some time.

Brokers are warning some borrowers to brace for a sudden rise in repayments of as much as £583 a month — or £6,996 a year on a typical £200,000 interest-only loan — as loss-making deals on offer in 2007 expire. Their rates could shoot up from 0% to as much as 3.5% if they default on to their lender’s standard variable rate (SVR). On a £500,000 mortgage, the payment shock would be £17,496.

However, Mervyn King, the Bank’s governor, said in last week’s inflation report that the economy could face a “slow and protracted” recovery with inflation staying low for the next two years.

Economists interpreted the report as indicating the Bank would keep interest rates at 0.5% until autumn next year. Brokers therefore said there was less pressure for borrowers to snap up a cheap fix.

Ray Boulger of John Charcol, the broker, said: “We’re telling clients Bank rate will be low for some time. I’m not expecting a rise this year and it could be two.”

Borrowers with Halifax face one of the biggest payment shocks, according to Moneyfacts. They took out its market-leading deal at 0.51 percentage points below Bank rate in April and May 2007 and will revert to an SVR of 3.5%. Monthly payments will rise from £667 to £1,001 — an increase of £334 a month or £4,008 a year on a £200,000 repayment loan.

We offer advice to borrowers and savers.

I have a super-low tracker, what should I do now?

It depends what rate your deal reverts to. Cheltenham & Gloucester and Nationwide have the lowest SVRs at 2.5%, while Halifax’s is 3.5%. The average is 4.14%, said the Council of Mortgage Lenders.

The best two-year fix is from HSBC at 2.89% with a £1,499 fee. It also has the best five-year deal at 4.39% with a £999 fee.

Those coming off super-low trackers with C&G and Nationwide therefore have an incentive to stick with their SVR and see if better deals come on to the market.

Capital Economics said last week mortgage rates could fall 0.50 points as competition returns to the market when banks become more willing to lend.

Trackers are tempting, too, but the best, Woolwich’s offset at Bank rate plus 1.99%, or 2.49%, carries a 1% early-redemption penalty which could end up costing you any savings you make from taking out the deal now.

I’m moving house, what should I do?

If you have to remortgage, because you are moving or need to borrow more money, experts advise going for a fix.

Louise Cuming of Moneysupermarket, the comparison site, said: “You are buying some insurance against rates going up, which they inevitably will at some point in the cycle.”

Boulger recommends a seven-year deal from Skipton building society at 4.79% with a fee of £895 for those with a 40% deposit.

And what about my savings?

Competition has improved in the fixed-rate market. Last week, ICICI, the Indian bank, went to the top of the best-buy tables with a two-year bond at 4.35%, beating Birmingham Midshires at 4.25%. Experts said there is no guarantee savings rates will stay this high, however, because money market rates have since fallen, so it could be worth fixing for two or even three years.