Prepare yourself for mortgage shock, but you can avoid steepest hikes


Hit hard: Homeowners face rate rises costing them hundreds of pounds

Mortgage rates are surging at a record pace, leaving homeowners at risk of yearly payments hundreds of pounds higher than in recent years. 

The average two-year fixed rate deal is now at its highest in nine years, and 1.4 percentage points higher than in December last year, according to rate scrutineer Moneyfacts. 

But there are steps borrowers can take to avoid the steepest hikes. 

What is going on with interest rates? 

The Bank of England has been raising interest rates in an attempt to curb soaring inflation. 

Its Base Rate has risen from 0.1 per cent in November to 1.25 per cent today, and is likely to increase again this week. Lenders pass on these rises to customers. 

Take, for example, someone with a £200,000 two-year fixed-rate mortgage that they took out in the summer of 2020. 

If they locked into the best deal available at the time, they would be paying interest of 1.09 per cent. But when they come to remortgage, the best equivalent rate will have jumped to 2.79 per cent, pushing up their repayment costs by £1,152 a year.

What you should do – fix your rate now 

If you have a variable rate mortgage, fix now to protect yourself from future rate increases. 

Someone with a £200,000 mortgage where the interest tracks the Base Rate would already have seen repayments rise by over £100 a month since rates started rising late last year.

If you are already on a fixed deal, plan ahead so that you are ready to lock into the best rate when it ends. 

Laura Suter, head of personal finance at investment platform AJ Bell, says: ‘Most borrowers are on a fixed-rate deal, so have been protected so far from rate rises. 

‘However, the big shock will come when their deal is up and they remortgage – then they will face the full effect of all the recent rate hikes in one go.’

Start researching remortgage deals a few months before your current one ends. Most mortgage offers are valid for six months so if you are due to remortgage before January 2023 you may be able to lock into a new deal at today’s rates. 

If rates are lower when it is time to remortgage, you can ditch the rate you booked in advance and go for a cheaper deal. 

You can also check your credit score to ensure you will eligible for the best possible mortgage rate. 

Do it early and you have time to improve it if necessary, for example by adding yourself to the electoral roll or challenging any mistakes.

Consider a green mortgage

Some lenders offer better rates if your home is energy efficient. Virgin Money, NatWest and Barclays offer a competitive rate if your home has a stellar energy performance rating certificate – A or B. 

Green mortgages are increasingly popular – internet searches for these products have quadrupled in a year, according to mortgage technology firm Twenty7Tec.

Although rates on green mortgages tend to be lower than average, they are not necessarily the cheapest available, so it still pays to compare prices. 

For example, Virgin offers a five-year fixed-rate greener mortgage at 3.49 per cent with £300 cashback. The best five-year fix across the market is 2.78 per cent from Ulster Bank, part of Royal Bank of Scotland. 

Overpay – then get a cheaper loan 

Reducing your mortgage debt by overpaying makes great financial sense. 

David Hollingworth, associate director at L&C Mortgages, says: ‘Borrowers who are still enjoying a low mortgage interest rate can overpay now to help to erode their balance more quickly and leave them with a smaller mortgage when their current deal ends.’ 

Overpaying can help you to reduce your loan-to-value ratio – the loan as a percentage of the home’s value – and make available loans at lower rates. 

For example, take someone with a home worth £283,000. If they had a loan-to-value above 65 per cent, they could get a five-year fixed-rate of 3.22 per cent from NatWest with monthly payments of £925. 

But if they had overpaid so that the loan-to-value was 60 per cent, they could access a lower five-year fixed-rate of 3.16 per cent from HSBC, with repayments of £819 a month. Over the full term, they would save £31,699 in interest payments.

Consider switching deals early 

Most fixed-rate and discounted-rate mortgages have early repayment charges, which make it prohibitively expensive to switch before a deal ends. 

However, if you are not far off the end of your current deal, it may be worth crunching the numbers to see if it is worth getting out early. 

If you are struggling to weigh up the numbers, a broker may be able to help. 

Angela Kerr, a director at HomeOwners Alliance – an organisation that provides practical advice to home buyers and sellers – says: ‘Tell the broker the deal you’re on now, what the early redemption payments are, and they can see if it still makes financial sense to switch now before higher rates come in.’ 

The number of borrowers paying early repayment charges has shot up this year – Yorkshire Building Society, for example, has seen an 88 per cent rise in the value of charges paid by its borrowers this year in comparison to the same period in 2021. 

Lengthen your mortgage term 

If you are struggling with monthly repayments, lengthening your mortgage term will bring them down. 

However, the longer it takes you to repay, the more interest you will pay. For example, if you had a £200,000 mortgage at three per cent, your monthly payments would be £948 over a 25-year term or £843 over 30 years. 

However, you would pay an extra £19,000 in interest payments in total if opting for the longer term. 

You could also consider converting some or all of a repayment mortgage onto an interest-only basis. 

For example, if you owe £200,000 on a repayment mortgage with an interest rate of three per cent, your monthly repayments would be £948. 

If you switched it to interest-only, the monthly payments would drop to £500. However, you would need to have a plan for how you will pay off the mortgage in the future. 

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