If you’re among the roughly 1.4 million people in the UK with a fixed rate mortgage deal about to end, are planning to buy a new property or are considering a remortgage to fund home improvement or retirement plans, you’re probably keeping a very close eye on interest rates, and may be more than a little concerned about what’s happening to mortgage costs.
Why are mortgages getting more expensive?
With the Bank of England making successive interest rate rises in order to combat inflation, the cost to lenders of borrowing money is increasing – so in turn, they have raised the interest rates they charge for mortgages.
The number of people this has affected has been inflated, in part, by the impact it’s had on people who rushed to take advantage of the temporary reduction in stamp duty two years ago – a move by the government to keep the property market moving during Covid. The lower stamp duty ‘window’ closed two years ago, and many people who rushed to secure mortgages are now coming to the end of a 2-year fixed rate deal. An estimated 400,000 2-year deals are set to end between July and October this year.
With interest rates having increased several times since then, people on fixed rate mortgages are getting something of a shock when they search for a new deal.
In the last 12 months or so, average two-year fixed rates have increased from 3.03% to 5.86%, and 5-year deals from 3.17% to 5.51%, representing quite a large chunk of extra money to find each month.
When a fixed rate mortgage period ends, the lender automatically reverts to the current standard variable rate (SVR). This is all very well if interest rates have remained stable, or dropped, but at the moment we’re seeing some quite steep increases, so payments based on the SVR are also showing a substantial increase.
Why is it so difficult to find a new fixed rate deal?
In recent weeks, lenders have appeared a bit spooked by the volatility of interest rates, and have started pulling deals with little or no notice. This has made things rather complicated and frustrating for borrowers trying to secure a remortgage and fix their monthly repayments again. On top of the rise in cost-of-living generally, it’s understandable that people are worried.
What can you do to make finding a new mortgage easier?
There’s no simple answer, and we can’t predict what the market will do over the coming months. However, as independent financial advisers, we have a good overview of the whole market, not just the ‘big name’ lenders whose moves tend to dominate the headlines. We’ve seen market volatility before, whilst we certainly don’t want to belittle the problems that people are facing, we can be confident that, ultimately, ‘this too shall pass.’
In the meantime, what can you do?
If your fixed rate mortgage period is imminent and you want to find a new deal to avoid going on to the SVR, you may have a number of options.
Some lenders offer a flexible fixed rate, so that you can take a fix, where there is no early repayment charge to switch to a better rate when they become available. Tracker rates are currently so close to the fixed rates, that this route might work best if you are looking to move within two years.
With 5-year fixed rates the early repayment charges are traditionally higher, so you need to look more carefully. It is possible for the savings on a new product to outweigh the amount of penalty, in which case it may be justified. After all, remember that penalties usually come out of the equity.
Our Senior Mortgage Adviser, Darren O’Connor, explains:
“Let’s say you have a 5-year fixed rate, and the penalty was, say, £10k to come out of it early, but a new mortgage reduces the monthly payment by £300pm. Then we have a saving over the new 5-year period of £18,000, giving you the £10k plus £8,000, before taking into account the fact that the property value may rise too, creating more equity.”
First-time buyer, or looking for a mortgage to move house?
The first thing to bear in mind is that the rates across the whole of the market are not attractive at the moment, so realistically it comes down to affordability, the stability of your income and your attitude towards the stability of your outgoings.
Talking to an IFA is really important here, especially if you’re a first-time buyer or don’t feel particularly confident in your understanding of how mortgages work. With rates high and mortgages more expensive than they’ve been for quite a few years, it’s important to understand the implications of further rate rises and early repayment penalties should you want or need to move.
An IFA will help you to work through the options and their implications, and to explore all the potential scenarios over the next few years.
The key thing right now is not to be panicked into buying into a deal which might not be the best option for you, based on your circumstances and future plans.
If you’re frustrated by trying to find a mortgage right now, or are planning for a remortgage or move in a few months, get in touch. Click here to find a Talis IFA.
Read part 2 for our top tips for preparing for your mortgage search.