Rising mortgage rates and a smaller pool of home loans to choose from means homeowners looking to secure their next deal could be in for a bill shock.
October marked the weakest start to the month for mortgage product choice in more than 12 years, according to Moneyfacts.co.uk. Encouragingly, the choice of products has since started to creep back up again – but with the added sting in the tail that lenders’ rates have also increased.
Market volatility and a string of recent Bank of England base rate hikes have been among the factors putting an upward pressure on mortgage costs.
Average rates for two and five-year fixed-rate mortgage topped 6% in early October, marking the first time this has happened for 14 years and 12 years respectively, according to Moneyfacts’ records. While the rates available will vary day-to-day, this could mean difficult choices for those on the 1.8 million fixed mortgage deals scheduled to end next year.
“The climb in interest rates will be worrying news for borrowers not only sitting on a variable rate deal, but also those who are soon to come off their fixed-rate mortgage,” says Rachel Springall, a finance expert at Moneyfacts.
Some borrowers who have savings put by may want to consider making overpayments on their mortgage, which could potentially give them access to a cheaper mortgage rate if overpaying means they move down into a lower loan-to-value bracket.
But individual circumstances vary – and so the pros and cons of potentially having less money in savings but more paid off the mortgage need to be weighed up very carefully.
There may also be other steps that homeowners can take to get themselves in a better position.
“Although the mortgage market is certainly still open for business, it does mean that deals are coming and going frequently and often with little or no notice,” says David Hollingworth, associate director, communications at L&C Mortgages. “That means borrowers don’t have the luxury of time to decide on the right deal and will have to move fast to secure a rate.
“Using an adviser could help, as they will hopefully be able to help borrowers zone in on the right deal as well as assist in making the application,” he adds. “Once the full application is submitted, the rate should be secured, but it will make sense to provide all the requested back-up documents as soon as possible to help the processing time.
“With borrowers eager to fix their rate to give some security, lenders will be being hit with a spike in of business and that is bound to have an impact on processing times. Whilst borrowers need to move quickly, it’s still important to shop around and they shouldn’t panic or make knee-jerk reactions.”
If their current deal is due to end in a few months’ time, homeowners may find they can secure a new deal now to move onto once their existing deal ends. Some borrowers may also be wondering whether they should break out of their current deal early in order to secure a mortgage.
But Hollingworth cautions that doing that could come with a significant early repayment charge – “and there’s no guarantee on where rates may ultimately end up in the years to come,” he adds. “Make sure that you know the figures, so you can at least go into the decision with your eyes open.”
Borrowers may also be able to widen choice of deals available to them by speaking to their existing lender. Katie Brain, consumer banking expert at star ratings business Defaqto, says: “It could be worth going direct to your existing lender or bank you already have accounts with, as many of the best buys are only available directly through the lender.
“Otherwise, it is worth going to a broker, who can search the market for you, but it may be tricky getting access to one at the moment due to sheer demand. Get your paperwork in order, so you can apply for the mortgage quickly,” she suggests.
Another dilemma may be whether to fix into a mortgage rate in order to have certainty, or to sit on a variable deal. “The decision for those with a fixed rate coming to an end now, whether to fix immediately or move onto a variable rate for a while to see where the market settles, is a difficult one to make,” says Paul Broadhead, head of mortgage and housing policy at the Building Societies Association (BSA). “The best bet is for borrowers in this position to reach out to their broker and/or current lender to discuss all the options available.
“Lenders are sensitive to the rising number of people facing a squeezed household budget,” he adds. “Anyone who is worried about being able to pay their existing mortgage, particularly on top of energy and food price rises, should get in touch with their lender, who will do everything possible to help them.
“The sooner they get in touch, the more tailored options the lender will be able to offer them. More holistic free debt advice is available from a range of organisations, including National Debtline (run by the Money Advice Trust) and StepChange.”
