Rates on new mortgages are continuing to climb, leaving millions of people in the UK – from those looking to switch to a new deal to would-be first-time buyers – wondering about their options.
After last week’s 0.5 percentage point interest rate increase, many mortgage borrowers worried about rising costs are unsurprisingly seeking the shelter of a fixed rate – but the deals on sale now are significantly pricier than those on offer only a few months ago.
Everyone’s circumstances are different but here we look at some of the options and things to think about for different categories of borrower.
Those whose fixed-rate deal is due to end in the next 6-12 months
Several hundred thousand people fall into this category – maybe more than 1 million.
If your deal is not ending for 12 months, your options are more limited, but if it is ending in perhaps six or seven months there are things you can do now.
The bad news for those whose deal is ending soon and who will be wanting to take out a new fixed rate is that the price of these has shot up. The financial data provider Moneyfacts this week said that the average new five-year fixed-rate mortgage has risen to 4.08% – up from 2.64% in December last year. At the time of writing, the very cheapest five-year fixes were at about 3.1%. It’s a similar story with two-year fixes, with the current average at 3.95% and the cheapest at about 2.8%.
So should you get every last drop out of your current deal, on the basis that it is going to be cheaper than a new fixed deal that you would move on to? Or is there an argument for some people to quit and move to a new deal now, before prices go up even more, or get one lined up for a few months’ time?
When it comes to bailing out of a deal early, most fixed-rate products have early repayment charges (ERCs) during the initial fixed period. “These vary depending on the lender but can run into thousands of pounds, which is why most borrowers bide their time until the ERCs expire before remortgaging,” says Mark Harris at the mortgage broker SPF Private Clients.
You would need to do the maths, looking at what you would have to pay to get out early versus what you might theoretically save by moving now rather than later – but the problem is that we don’t know how much higher the price of new fixed-rate deals is going to go.
“The alternative is to stick with your current low rate and line something up in good time for when your deal comes to an end,” says David Hollingworth at the broker L&C Mortgages.
The good news is that remortgage offers are typically valid for up to six months, so if your deal is ending in, say, five or six months’ time, you can reserve a deal now.
That way, Hollingworth says, “you get the best of what you’ve currently got but you are also securing a rate that is currently available”.
Moneyfacts says the “shelf life” of a new mortgage deal has plummeted to a new low of only 17 days as lenders pull and reprice their offerings, so acting fast is the name of the game. That said, once you have made the full application, that should secure the rate.
Harris says people should check their mortgage paperwork and work out when their deal expires. “Plan ahead roughly six to seven months prior to this date and review what you want to do, as well as what is available. An independent mortgage broker can help you through all the various options. This also gives you time to arrange or organise your paperwork as this may be requested by a new lender. Your existing mortgage provider will probably contact you, too, and offer some remortgaging options.”
Those sitting on their lender’s standard variable rate (SVR)
About 1.1 million borrowers are on an SVR. These can change at the lender’s discretion but most people will probably see an increase in their monthly costs after the latest interest rate rise.
The average SVR now stands at 5.17% – the highest since 2008, according to Moneyfacts.
In the majority of cases, those borrowers on a high SVR “should get off it as soon as they can”, says Jonathan Harris at the broker Forensic Property Finance.
Mark Harris adds that circumstances where it may be beneficial to stay on the SVR might include if you are coming towards the end of your mortgage or have a low loan amount.
If your circumstances have changed and you don’t think you can remortgage, switching to another deal offered by your existing lender will get you on to a cheaper rate without having to go through a full application process.
Those on a base-rate tracker deal
About 800,000 borrowers have a tracker mortgage. These rise and fall in line with the official cost of borrowing.
If rising interest rates are going to give you sleepless nights, then a fixed rate is probably a good idea
If you are still on a lifetime tracker with a very low pay rate that you took out many years ago, it might make sense to stay put for now and maybe consider remortgaging a few months down the line, Jonathan Harris says.
Some borrowers may actually elect to take out a tracker deal now because in some cases the rate will be lower than you can get on a fix, Hollingworth says. For example, at the time of writing, Skipton building society had a deal where you pay the Bank of England base rate plus 0.66% for two years – ie 2.41% at the moment.
However, if rising interest rates are going to give you sleepless nights, then a fixed rate is probably a good idea.
Would-be first-time buyers
“They should get on with the basics as usual: save, tidy up their credit files and outstanding debts, and minimise their regular expenditure,” says Jonathan Harris, adding: “Make sure you can really afford to buy at current levels, and can service your mortgage debt without too much difficulty.”
What happens to the market is, of course, crucial: according to Halifax, UK house prices fell in July for the first time in more than a year.
High house prices mean raising a big deposit, and wannabe first-time buyers are also having to contend with higher fixed-rate deal costs, and higher outgoings (energy bills and so on) that will affect how much they are able to borrow.