Mortgage interest rates are surging – homeowners need to act now
Rising interest rates look set to spring a nasty surprise on millions of homeowners next year. You need to take steps today to protect yourself from a mortgage rate shock.
Close to two million homeowners face a mortgage shock next year. A surge in property purchases post-lockdown means 1.8 million homeowners’ mortgage deals will end in 2023, according to UK Finance. If you are one of them, you could be in for a serious rate shock.
Since 2020, mortgage rates have risen by 152%. In other words, they’ve more than doubled, which means that anyone remortgaging today from a £200,000 two-year fix could see their annual repayments rise by more than £1,100.
Meanwhile, if you have a five-year fixed mortgage which is coming to an end soon, your interest rate could rise from the region of 2.85% – which was the average for a five-year fix taken out in 2017 – to the current average of 3.89%. That would add £1,656 to your annual bills.
So if your mortgage deal is due to end soon, start shopping around for a new deal now. Most mortgage offers are valid for six months, so you can lock in a deal at today’s rates and protect yourself from any more rate rises.
What’s happened to fixed rate mortgages this month?
Fixed rate two and five-year mortgages saw their biggest rise on record between June and July, according to Moneyfacts. The average two-year fixed rate mortgage is now 1.4 percentage points higher than in December. With the Bank of England expected to raise the base rate again this month, there doesn’t appear to be any respite in sight for homeowners.
Mortgage | Rate | Fee | Max LTV | % Change in rates from last month | |
Two-year fixed rate mortgage | Ulster Bank | 2.75% | £995 | 80% | +17.5% |
Five-year fixed rate mortgage | Ulster Bank | 2.78% | £995 | 80% | +13.5% |
Ten-year fixed rate mortgage | Halifax | 3.33% | £995 | 60% | +18.1% |
Source: Moneyfacts
Should I fix my mortgage?
The decision to fix your mortgage is a personal one, but if you are concerned that interest rates will rise further, or if you would struggle to repay your loan if rates do rise, then it makes sense to at least explore fixing now.
And if you haven’t changed deal for a while, then you should certainly be looking. Anyone on a standard variable rate mortgage is likely to have seen their monthly repayments go up significantly since December.
Decide how long you want to fix for and follow the tips below to try and keep your mortgage repayments affordable and shop around for the best fixed rate deal you can get.
How to keep your monthly mortgage repayments down
There are a few things you can do to keep your mortgage repayments down if you are worried about being able to afford your bills following the interest-rate rises.
One option is to lengthen your mortgage term. Most people opt for a 25-year mortgage term when they first get a mortgage. That then gradually decreases as they pay off the debt. But it is possible to get a mortgage of up to 40 years with some lenders.
Lengthening your mortgage term can make a big difference to your monthly repayments. For example, someone with a £200,000 mortgage at an interest rate of 2.75% would repay £922 a month over 25 years. If they lengthened their mortgage term to 35 years that repayment would drop to £742. Just be aware though that you’ll pay significantly more interest over the life of the mortgage – £34,810 in the above example. So, only lengthen your mortgage term if you really need to.
Another way to cut your repayments is to use your savings to overpay your mortgage. Overpaying while you are still on a low interest rate means you can make a big dent in the capital you owe. That will mean your repayments are lower when it is time to remortgage.
Overpaying could also give you access to better interest rates, if it affects your loan-to-value (LTV) ratio (that is, the amount you need to borrow relative to the overall value of the house). The lower your LTV, the cheaper the deals you can access, so take a look at how much you would need to pay off to unlock those lower interest rates. You may find even a relatively small overpayment could make a huge difference.
Here’s an example. A borrower with a house worth £450,000 and a £275,000 mortgage, has an LTV of 61.1%. If the borrower can pay just £7,000 off this debt, it would take the LTV below 60%. In turn, this would mean they can get the best-buy five-year fix deal of 3.16% with monthly repayments of £1,293. Without the overpayment the best rate they could get would be 3.22% – that’s an extra £43 more a month.
Plus, over the five-year term they would save £2,074 in interest. If they had left that £7,000 in the bank, it would have earned just £1,274 interest in the best five-year bond.
Before you apply for a new mortgage, also take the time to check your credit rating. If there are any errors, contact the credit reference agencies to get them corrected. Also take steps to boost your score (for example, by joining the electoral roll if you’re not already on it). That way you maximise your chances of being approved for the best mortgage rates.