How to fix your mortgage problems

Is the fixed-rate mortgage a safeguard against rising interest rates? Susannah Kirkman assesses the pros and cons. As the General Election approaches, teachers' thoughts are turning to fixed-rate or discount mortgages. The Teachers' Building Society, which offers a five-year fixed-rate mortgage at 7.9 per cent, reports that this plan is "going like a rocket". Hugh Nichols, the society's assistant general manager, says: "People are assuming that interest rates are on the rise. The perception is that, whoever wins the election, rates will probably go up."

Mortgage analysts point out that interest rates are usually kept artificially low before an election, and then have to rise afterwards. In any case, at around 7.25 per cent for the standard variable rate, mortgage rates are at their lowest for around 30 years, so a rise seems inevitable.

Last week, lenders were predicting that variable mortgage rates would increase by up to two percentage points by the end of the year, adding about Pounds 50 to the monthly cost of a Pounds 50,000 loan.

Fixed-rate mortgages generally appeal to those who want to budget, as it helps them to plan their outgoings. Philip Cartwright, of London and Country Mortgages, the independent brokers, says: "If you're a spendthrift, a fixed-rate mortgage is better than a discount mortgage."

According to Mr Nichols, most of the teachers who have signed up for London and Country's five-year fixed-rate plan are over 35 with an existing mortgage, and some of them have negative equity.

But there is a sting in the tail. Many cut-price mortagages build in heavy penalties for borrowers who want to redeem their mortgages before the agreed period has elapsed. These penalties can apply not only to the period of the cheap loan, but also for several years after the fixed or discounted rate has ended.

The TBS five-year fixed rate plan, for instance, adds on a one-year penalty term once the five-year rate has finished. This means that the building society will charge borrowers five per cent of the amount they repay if they redeem the mortgage, or even make a partial repayment worth more than Pounds 1,000 of the loan, within six years of taking out the fixed-rate plan.

Mr Nichols justifies this extended redemption penalty on the basis of cost; to make the cheap deals viable, the building society has to be sure that borrowers will stay with them for a while after the special deal has ended.

"If we're going to offer a competitive package, we have to penalise people who break it," he says. "If we had lower penalties, the interest rates would be higher."

However, Mr Nichols says the TBS can afford to be flexible; it would not insist on redemption penalties for someone moving house in the middle of a fixed-term mortgage, for instance, providing the borrower stayed with the plan.

One advantage of the TBS plan is that there are no arrangement fees, which can be around Pounds 300. And it also offers 12 months' free sickness, accident and redundancy insurance. But it does insist that buildings insurance is taken out with the TBS.

"This can be expensive and is best avoided," advises Mr Cartwright of London and Country. He suggests that Bristol and West could offer a better deal, despite the arrangement fee of Pounds 275. It has a five-year fixed rate of 7.48 per cent with no conditional insurances.

Discounted rates of between one and two per cent off the ordinary variable mortgage rate can also allow large savings. For existing borrowers who have been with their lender for more than three years, and whose mortgage represents less than 75 per cent of the value of their property, Mr Cartwright recommends a 1.65 per cent discount mortgage with National Counties.

The reduced rate applies until January 1999 and gives a mortgage rate of 5.34 per cent at today's rates. The building society will pay all the fees involved in transferring your mortgage and borrowers will only have to stay with National Counties for three years altogether. This scheme could save Pounds 80 a month on a Pounds 50,000 loan when compared to the ordinary rate charged by most lenders.

Teachers who think a job move may soon be on the cards should make sure their lender is flexible, urges Mr Cartwright. "People who move often want a larger loan, so they should ask what the normal maximum loan is, and check whether the lender would allow them to borrow the extra money at a favourable rate, " he says. In any case, it may be wiser not to tie yourself to a six-year scheme. "A three-year window is easier to see through," Mr Cartwright says.

Checklist for cut-price mortgages

1 Does the lender have a competitive standard variable mortgage rate? There is no point in locking yourself into a new deal if you have to pay more than the going rate once the discounted period is over.

2 Will you have to take out buildings insurance with the lender? This is often bad value for money.

3 How long will you be committed to the lender once the cut-price rate has finished? You will find yourself liable for redemption penalties if you change your lender before the penalty period has expired.

4 What are the redemption penalties? These can vary between Pounds 2,500 and Pounds 873 for a Pounds 50,000 mortgage.

5 Don't move lenders just yet if you are with the Halifax, Northern Rock or Alliance and Leicester, as you will miss out on your free shares when these groups go public.

For further information, contact: Bristol and West Building Society 01225 424183 National Counties Building Society: 01372 744155 Teachers' Building Society: 0800 378669 London and Country Mortgages (independent brokers): 0800 373300

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