Mortgage rates are hitting record highs – should you fix your mortgage?
Two-year mortgage rates have hit a 14-year high, and are likely to keep climbing as interest rates rise. Could fixing your mortgage now protect you from a rate shock in a few months?
The interest rates on fixed-rate mortgage payments have continued to rise, with Moneyfacts’ latest data showing the average two-year fix has climbed to 6.53%. This is the highest rate seen for fixed mortgages since August 2008.
Meanwhile the interest rate on the average five-year fixed rate mortgage has risen to 6.36%, its highest since November 2008.
The increases came even after new chancellor Jeremy Hunt tore up Kwasi Kwarteng’s mini-budget in the hopes of stabilising financial markets. Interest rates could rise further on 3 November when the Monetary Policy Committee next meets. If they do rise, then it is likely to translate into higher mortgage rates, meaning now may be a good time to fix your mortgage.
Should I fix my mortgage?
As of 1 October, the average standard variable rate (SVR) was 5.63%, according to data from Moneyfacts. This is lower than the average two- and five-year fixes, which means fixing might no longer be the straightforward option. But of course, if interest rates go up, that SVR will shoot up too.
“The right type of mortgage for a borrower will come down to their individual circumstances and their future plans,” says Eleanor Williams, finance expert at Moneyfacts. “For consumers hoping to mitigate some of the impact of the ongoing cost of living crisis with a new mortgage deal, seeking qualified advice is likely to be a wise move, as this remains a very changeable landscape and it’s vital to ensure they select a mortgage that suits their specific priorities and needs.
“Fixed rate mortgages provide an ability to budget to a set repayment each month, so for those who prioritise stability these may be an option,” she continues.
“However, for those comfortable with them there are also other products to consider such as base rate tracker mortgages or discounted variable products. These may have lower initial rates than they may find if they perhaps choose to remain on their lenders revert rate or standard variable rate, especially if they can secure an option with low or no early repayment charge penalties, so that they might be able to take advantage should a tempting new deal come to market down the line.”
Whatever you decide to do, make sure you have done your homework. Having all the information will help you decide whether now is a good time to consider buying a property, whether to remortgage or to just hold tight and wait for further developments.
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 as interest rates rise.
Lengthening your mortgage term – is it a good idea?
One option is to lengthen your mortgage term. Most people opt for a 25-year mortgage term when they first get a mortgage. 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.
Use savings to overpay your mortgage
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.