As if things were not tough enough already, those looking for a new mortgage deal are now being squeezed on all sides.
Some experts are predicting the Bank of England will raise interest rates five more times, on top of the 12 since December 2021 that have taken the central bank’s key base rate to 4.5% – the highest since 2008.
At the same time, the cost of new fixed-rate mortgages – popular with those keen to protect themselves from rising interest rates – is rising. This week, the former Bank of England governor Mark Carney predicted interest rates would remain high “for the foreseeable future”.
Here, we consider some of the options for those seeking a mortgage.
So what’s the latest on interest rates and mortgage costs?
UK banks and building societies have been pushing up the cost of their fixed-rate mortgage deals after data published last month revealed higher than expected annual inflation of 8.7%, leading markets to bet that the Bank of England would raise interest rates above 5% by the end of the year.
However, the money markets are now predicting interest rates could be near 5.75% by the end of December, and Laith Khalaf at the investment platform AJ Bell said “a few hawkish comments from the Bank of England, or some more ugly inflation data, could easily tip those expectations up to 6%”.
With the base rate currently at 4.5%, Khalaf said the markets were now firmly pricing in an interest rate rise next week, and then four further hikes. That is bad news for the roughly 2.2 million people on a variable-rate mortgage. About half of those are either on a base-rate tracker or discounted-rate deal. The other half pay their lender’s standard variable rate (SVR).
Meanwhile, the average rate on a new two-year fixed-rate deal was 5.98% on Friday, according to Moneyfacts. The typical rate on a new five-year fix is 5.62%.
The typical new two-year fixed rate has been on a rollercoaster ride: in May last year it was just over 3%, and then 4.74% on 23 September, the day of the mini-budget, but in the weeks that followed it soared above 6% before falling. But last month’s inflation data has propelled the average rate up again.
Based on a £200,000 mortgage, someone taking out a typical two-year fix right now will pay close to £4,000 a year more than someone who signed up for an average two-year fix in May last year.
My fixed-rate mortgage is due to end soon and I’ll need to remortgage – what do I do?
Official data indicates about 1.3 million people have a fixed-rate mortgage deal that will expire between the start of next month and the end of June 2024.
If your deal is not ending for another year or so, your options are more limited, but for many others there are things you can do now.
Remortgage offers are typically valid for up to six months, so if your deal is ending in, say, five months, you can reserve a deal now and wait to see how things pan out. If the cost of new deals has come down, you are not committed to that mortgage offer. But if they have risen, you have at least locked in at a lower rate, even though it may not feel like a great result.
If your deal is ending shortly, perhaps in the next few weeks, these are tough times. You are probably looking at a big hike in payments. Deals are coming and going at breakneck speed, and the advice you may get today could be different next week.
Nicholas Mendes, a mortgage technical manager at the broker John Charcol, said: “For people looking for stability, fixed rates are still the best option.”
What other advice is there?
Talk to your broker or lender well ahead of time to see what advice they can offer. Some people will be able to extend the length of their mortgage term, which will reduce the monthly payments. Doing this means it will take them longer to pay off the loan, so they will pay more interest. However, some will see this as a price worth paying.
Meanwhile, in some cases the lender may agree to move part of someone’s mortgage over to interest-only, so they clear just the interest that accrues on that part, thereby cutting monthly repayments.
Those fortunate enough to have some spare savings cash may want to consider using some of it to reduce what they owe. However, there are sometimes restrictions on overpaying. Others who are able to may want to put as much into savings as possible now, so they are ready for the higher bills that are probably inevitable.
If you are really concerned, you can ask your mortgage lender for a payment holiday. They may say no, but if they do offer you a break, it would typically be for about six to 12 months. But you should probably treat that as a last resort.
I’m on a base-rate tracker deal – what do I do?
A tracker directly follows the base rate, so your payments will – if the predictions are correct – almost certainly be going up over the coming months.
Much of the above advice will apply to these people, too. If you are concerned, speak to your lender to see what help they can offer, and maybe consult a broker.
You could look at moving to a fixed-rate deal. That may not be a tempting proposition but at least you will know that your monthly payments are fixed and will not go up for the period of the deal, which makes it easier to budget.
I’m on my lender’s standard variable rate. Should I get off it?
The short answer for most people sitting on their lender’s SVR is yes. Borrowers typically go on to the SVR when a deal ends.
SVRs can change at the lender’s discretion but most people will probably experience an increase in their monthly costs after the next interest rate rise.
The average SVR is 7.52%, according to Moneyfacts, and some lenders charge a fair bit more: Virgin Money’s SVR is 8.74% from 1 July. So, even with everything that has been happening, some people could save several hundred pounds a month by switching to a fixed-rate deal.
