Big borrowers denied top mortgages

If you want a home loan of more than £250,000, you may find you are barred from the top deals. But there is still plenty you can do to beat last week’s rate rise – Clare Francis writes

Homeowners with larger loans are losing out after last week’s rate rise as lenders restrict their best deals to smaller mortgages.

High-street banks and building societies know customers with bigger loans are more likely to switch at the end of a special offer, so they are limiting their lowest rates to people borrowing less than £250,000.

However, savvy homeowners are beating the rate rise by bypassing the high street. Many are negotiating bespoke deals with brokers, where they split their loans between the top fixes and discounts to get the best of both worlds. Some are even agreeing their own rate “protection” with investment banks.

Cheshire building society, for example, has a two-year fixed rate at 5.35%, which is the market leading deal for housebuyers. But it is available only for loans up to £250,000. Halifax has the best two-year tracker at 0.51 points below Bank rate, or 5.24%, but the maximum loan is £500,000.

Melanie Bien at Savills Private Finance, a broker, said: “Lenders make little, if any, profit on market-leading deals. They know those with large mortgages are more likely to switch at the end of the fixed or discounted term, so many restrict their best products.”

Last week’s quarter-point rise in Bank rate to 5.75% – its highest for six years – added another £41 a month, or £500 a year, to a typical £200,000 interest-only mortgage. Borrowers were already paying an extra £167 a month, or £2,000 a year, following four rate hikes since last August, and analysts are warning there could be further pain ahead.

More than half of economists expect rates to hit 6% by the end of the year, according to a poll by data company Reuters, and some warn there could be another hike to 6.25%.

Roger Bootle, economic adviser for Deloitte, the accountant, said: “I think there is at least one more quarter-point rise to come, after which things are much less clear. If the housing market and consumer spending prove resistant, rates will go higher.”

Hundreds of thousands of families with fixed-rate mortgages have been protected from the rises so far, but more than 2m households will be coming off fixed-rate deals in the next 18 months and face a big payment shock. The best two-year fix in July 2005 was 4.22% from Newcastle building society. Someone with a £200,000 interest-only mortgage would see their payments leap from £703 a month to £923, even if they remortgaged to the current top two-year fix at 5.54% from Stroud & Swindon.

Even borrowers who can’t get the best rates have plenty of options to beat the rate rise.

Mix and match

Borrowers whose loans are too big to qualify for the best deals, or who cannot decide between a fix or a discounted rate, should consider splitting their mortgage.

Most economists think there will be another quarter-point rise, but about 40% believe rates have now peaked. Rather than paying a premium for a fixed-rate mortgage, therefore, many lenders will allow you to split your mortgage between two products, so you could have part on a fix and the remainder on a lower variable rate.

This may also allow you to get deals that would otherwise be unavailable because of your loan size. For example, someone with a £1m mortgage could have half on Halifax’s two-year tracker at 5.24%, and half on its two-year fix at 5.69%. Both deals are only available up to £500,000.

You have to have both elements with the same lender, though. Halifax and Chelten-ham & Gloucester will only charge you a single arrangement fee – normally the higher – but some, such as Portman, will charge you fees on both products.

Overpay

Borrowers with big savings could pay off a chunk of their mortgage to keep their repayments the same even if their rate goes up.

Suppose you have a £200,000 interest-only loan on Newcastle’s 2005 fix at 4.22%, paying £703 a month, but are moving to a new fix at 5.54% with repayments of £923. You would need savings of £47,000 to pay off a chunk of the loan and keep the monthly outgoings at £703.

If you need access to your savings, go for an offset loan. Suppose you had a £1m mortgage and £400,000 in savings. You could base your monthly payments on the full £1m, but because of the savings you would be charged interest on only £600,000 of the loan. You therefore overpay each month and will clear your mortgage more quickly.

Alternatively, you could ask the lender to recalculate your repayments so they are based on £600,000 rather than £1m. In both cases you could still access your cash.

L&C has an exclusive offset deal from Intelligent Finance which charges 0.36 points below Bank rate for two years, or 5.39%.

Negotiate your own protection

Many super-wealthy borrowers find they cannot get fixed rates because lenders will not take the risk on multi-million-pound loans, or they may face exorbitant penalties to get out of a variable-rate deal. Many borrowers in this position go direct to investment banks to organise their own protection.

Suppose your mortgage rate is 5.75%, but you think rates will keep rising. You could buy a three-year “swap” from an investment bank that is fixed at 6.32%, according to Stone-hage, a wealth-management firm. While rates are below 6.32% you will have to pay the difference between that and your variable rate– 0.57 points at present. However, if interest rates exceed 6.32%, the bank would pay you.

Take out a multi-currency loan

Interest rates are lower in some countries – 0.5% in Japan and 2.5% in Switzerland. But if sterling weakens against the currency in which you borrow, your debt will go up. If your loan is in euros, say, but you make repayments in sterling you can hedge against fluctuations by taking out a forward contract to fix the exchange rate for up to two years.

Alternatively, multi-currency mortgages are offered by debt-management firms such as ECU Group. They shift your mortgage into currencies expected to weaken against the pound so that the value of your loan, when converted back into sterling, goes down.