Given the Bank of England’s recent base interest rate hikes, and warnings of future increases to tackle inflation, the cost of borrowing to buy a home is also on the rise.
Mortgage holders coming to the end of their fixed rates of interest will soon be navigating higher rates with fewer loans on offer than when they were last in the market, particularly if they agreed their mortgage between March 2020 and December 2021 when the Bank of England’s base rate was at its all-time low of 0.1 per cent.
It will be a shock for many homeowners. But don’t panic, there are things you can do and people you can go to for help preparing for the next couple of months and years.
Here’s my advice for how to beat the mortgage timebomb, whatever your circumstances.
If you’re a first-time buyer
We mustn’t forget we are still in a low interest rate environment, historically speaking. Most people buying their first home now won’t remember the interest rates of the late Eighties when the Bank base rate hit 14.875 per cent.
But don’t throw caution to the wind. In a property market like this one where there’s not much supply, if you’ve got a mortgage agreed in principle, have done all your paperwork and you’re at a viewing with 25 other buyers, it’s understandable that you’d be tempted to jump in and buy whatever you can. Now is not the time to do that.
A good flat will always be a good flat, a rubbish flat will be a rubbish one in any market. There are some rubbish flats being sold very quickly at the moment but those are the ones you don’t want to be stuck with in uncertain times.
If, on the other hand, you are buying for the long term and you choose something that you can add value to, and you can get a decent mortgage deal before interest rates rise again, then go for it.
If you’re on a variable rate
Get on a fixed one now. Talk to a mortgage broker — you might want to think about fixing for as long as you can.
If you have six months left on a fixed rate
Check what your current lender will offer you and how it compares to others. Some lenders have extended their product transfer periods from three to six months. This is when you stay with your current lender and switch from your old deal to a new one. You don’t need to do a new mortgage application or affordability checks, you just choose which deal to move to.
You could also look to remortgage and fix a deal six months in advance, securing a new rate and switching when your deal ends to avoid early repayment charges. If rates decrease before your start date, you can exit and switch to a better deal. If rates increase (which is more likely), then you have already secured the best rate you can.
If you have two to three years left on a fixed rate
Speak to a mortgage broker who will calculate whether it’s worth you paying the redemption penalty to get out early and agree a five- or 10-year fixed rate mortgage instead.
If you want longer-term certainty
It’s certainly worth looking into 10-year fixed-rate loans, particularly if you don’t plan to move again in that time. The reasons most people don’t tend to fix for that long include wanting more flexibility, the scarcity of those deals and the higher fees charged for longer fixes.
Lenders are in business to make money on what they’re lending so fees charged on a 10-year fix are usually higher and there are also always early redemption fees. Ask a mortgage adviser which fix and mortgage term will suit you best.
If you have the money to overpay your mortgage
Reducing the overall balance you owe — and pay interest on — is always a good idea if you can manage it, especially before your lender’s interest rates rise again. An online calculator will show you by how much you can reduce your mortgage term if you pay a lump sum now.
Alternatively, you are usually permitted to overpay the equivalent of 10 per cent of your remaining mortgage debt each year, which would bring down your monthly repayments and shorten the term.
For example, if you have an outstanding mortgage debt of £200,000 and a term of 25 years at an interest rate of 3.5 per cent, overpaying your mortgage by £200 a month would save you £26,217 in interest alone and means you would pay off the debt five years and 11 months early.
If you’d rather renovate than move
People often move because they have run out of space in their current home but if you like the area you live in and can’t afford to upsize within it, might it be cheaper to extend instead?
Thanks to inflation, the war in Ukraine and shortages in the labour market, building works are taking longer and costing more so you’ll need to make a careful budget and weigh up the cost of the works against the cost of moving, including stamp duty, conveyancing fees and so on.
If you’re planning to remortgage to finance any building work then you’ll have to factor in rising interest rates in this instance, too.
If you’re considering renting until you find the right home to buy
Rents are rising and are going to continue to do so. A large number of buy-to-let investors are selling up, which means there are fewer rental homes to choose between, pushing rents up.
This will also make it harder for tenants to save the larger and larger deposits they will need as mortgage finance becomes more expensive and more limited.
If you’re in a position to buy now, and you’re buying for the long term, do so.
If you think you can find the best mortgage without professional help
There are deals out there but you have to be very smart and incredibly organised to spot these yourself. Sometimes a mortgage can be available for just a few hours if a lender has more money than they’ve lent in a certain period, for example. This is why it’s worth finding a good mortgage adviser to help you find the best deal.
Some charge fees to the borrower but many are paid commission by the lender so offer advice for free. It’s up to you which you feel most comfortable with. In the past, people worried that fee-free brokers didn’t have access to the same deals as fee-charging ones but that usually is not the case now.
Ultimately, it’s important to remember that while knowing that house prices are falling or growth is slowing is not a nice feeling, unless you are moving it’s just numbers. Your home is your home, buy it because you want to live in it.
