The interest rates on fixed-rate mortgage products rose to a peak of 6.65% late last year in the aftermath of Kwasi Kwarteng’s mini-Budget.
And though the market stabilised since a significant number of mortgage offers are being pulled right now, and mortgage rates are increasing and expected to increase further amid concern about future interest rate rises from the Bank of England.
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According to Moneyfacts, the average rate for a two-year fixed rate product is 5.72%, while the rate for a five-year fixed rate mortgage is 5.41% (as of 5 June)
The rates are a far cry from the 2% average at the beginning of 2022.
The rates on standard variable mortgages now stand just above 7.52%, as of 1 June, a level not seen since 2008.
In light of that, is now the time to fix your mortgage?
Should I fix my mortgage?
The Bank of England hiked its base rate to 4.50%, its highest level since 2008.
Borrowers who locked into a five- or ten-year fixed mortgage before the mini-Budget chaos will not have to worry, and will likely be benefitting from a lower rate.
But the rate rise will have come as “disappointing news to borrowers who are not locked into a fixed rate mortgage, as their monthly repayments automatically rise,” says Rachel Springall, finance expert at Moneyfacts.
“The incentive to fix is clear from the continued rise to the average Standard Variable Rate (SVR), which is now above 7%, a level not breached since 2008,” continues Springall.
“A rate rise of 0.25% on the current average SVR of 7.12% would add approximately £772* onto total repayments over two years.”
Whether you decide to fix or not, make sure you have done your homework. Borrowers would be wise to keep an eye on the property market 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.
Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance.
Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.
Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.
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