Homeowners face heftier mortgage costs as rates rise
High mortgage rates are proving a shock to hundreds of thousands of homeowners looking to remortgage in 2023.
Around 700,000 fixed-term deals are coming to an end in the second half of this year, according to calculations from the Office for National Statistics (ONS).
The majority of these rates were secured below 2% – but current mortgages are priced significantly higher than they were two years ago, meaning borrowers coming to the end of their fixed term will likely face higher costs when they switch.
Here, we explain what's happening in the mortgage market and provide a step-by-step guide to getting a good deal when remortgaging.
Thirteen consecutive increases in the Bank of England's base rate have resulted in higher costs for lenders and borrowers. The base rate is now 5%, having been just 0.1% in December 2021.
Mortgage rates had been dropping after the fall-out from last autumn's mini-budget settled, but since May, deals have been back on the increase. This is because lenders fear the base rate will continue to rise.
As a result, if you're coming to the end of your fixed-term mortgage, it's likely your rate will be higher when you come to remortgage.
Data from Moneyfacts shows borrowers who took out a mortgage at 60% loan-to-value in November 2020 could get a rate of 1.1%. Whereas now, the cheapest interest rate comes in at around 5% for a five-year fix.
The graph below shows how mortgage rates, according to Moneyfacts, have changed significantly over the past 12 months.
If you're coming to the end of your fixed-term mortgage, the best thing to do will depend on your situation. For example, if you're:
· Very near the end of a fixed term: start shopping around for a new deal now. You can usually secure a new mortgage six months before the end of your current one.
· On a fixed term with more than six months to run: don't do anything for now. It's usually a bad idea to switch deals mid term, as your lender will likely impose significant charges for doing so. If you think switching early may make sense, take advice from a mortgage broker.
· On a tracker mortgage: trackers rise in line with the base rate, so it's likely you'll be paying much more than you were a few months ago. Whether it's a good idea to switch before the end of your term depends on the specifics of your current mortgage and your personal circumstances. Take advice from a broker.
· On a standard variable rate (SVR) mortgage: this is usually the most expensive type of mortgage. If you're able to switch to an alternative deal, do so as soon as you can.
Higher mortgage rates are - at the moment - a fact of life, but there are some steps you can take to ensure you get the best possible deal when switching. Here are our top tips:
Most homeowners have a fixed-rate mortgage. This means your rate and monthly repayments stay the same for a set amount of time (usually two or five years).
It's important to check when your fixed term is due to expire. If you don't remortgage by then, you'll be moved on to your lender's standard variable rate (SVR).
Being on an SVR is usually more expensive, and leaves you exposed to rate increases at any time, so you could face much higher monthly repayments if you fail to switch. The average SVR offered by the UK's main mortgage providers is 7.52% - the highest it's been since for 15 years, according to Moneyfacts.
With high rates likely to remain in the short term, it can be tempting to remortgage early to try and snag a deal before prices get even higher.
In most cases, however, this isn't the best idea. If you remortgage during your fixed term you'll need to pay charges to your lender. This, when combined with arrangement fees for a new mortgage, will likely override any financial benefits of switching.
The monthly repayments you've been making may have moved you into a lower loan-to-value (LTV) bracket, which could help you get a cheaper rate.
For example, if you took out a 90% mortgage two years ago, you'll now own more of the property, so you may be able to remortgage at 85% loan-to-value.
You might also be able to benefit from house prices changes. While the market has been slowing recently, the value of your home may still have increased since you last remortgaged, which could lower your LTV bracket. Lenders will usually conduct a remortgage valuation to determine the property's current value.
To find out your current LTV, divide the amount you still owe by the amount the property is currently worth, and multiply by 100.
So if you owe £125,000 and the property is worth £150,000, (125,000/150,000) x 100 = resulting in a LTV of 83%.
Remortgaging with your current lender is called a product transfer. There are some benefits to doing this: you won't need a new credit check or a valuation, and you may be able to avoid expensive arrangement fees.
On the other hand, with dozens of lenders competing to offer the best mortgage deals, it's highly unlikely that your current one will give you the very cheapest rate.
You should be able to find out your product transfer rate by logging in to your online mortgage account.
If it's not there, be proactive and give your bank a call. If you wait to receive a letter, you might miss out on a better deal elsewhere.
You can usually arrange a new mortgage up to six months before the end of your fixed term.
To get an idea of the best rates currently available, check out our story on the cheapest mortgage deals. For more tailored advice suited to your specific circumstances, speak to us on XXXX
Mortgage deals currently have a shorter shelf-life than before, with the best deals sometimes only staying on the market for a matter of days. So if you find one you definitely want, it might be a good idea to secure it in advance.
Two and five-year fixes are the most common types of mortgage, though three, seven and 10-year fixed terms are available, too.
If you're choosing between two and five-year deals, there's very little difference between the best rates.
This means it's best to opt for a term that suits your own circumstances. A two-year fix will give you flexibility to switch sooner if rates fall, but a five-year fix will protect you for longer if they continue to rise.
Despite being more expensive, two-year fixes are currently proving to be more popular as borrowers are gambling interest rates will be lower come 2025. But there is no guarantee this will be the case.
Think about your medium-term plans. If you're planning on staying put in your current home, a five-year fix will offer greater stability. If you might look to move, however, a two-year fix will offer flexibility and eliminate the possibility of incurring early repayment charges.
If you're undecided between a short or longer-term fix, you could always go down the middle and opt for a three-year term - where the best rates can be competitive.
When comparing mortgage deals, don't just focus on the initial rate.
Upfront fees can have a significant impact on the overall amount you'll pay. Some mortgages are offered fee-free, while others come with fees well over £1,000. In some cases, a more expensive fee-free deal can be cheaper.
You may find it a struggle to get accepted for a new deal when you come to remortgage – this will usually be the case if you fail stricter affordability tests brought in after you bought your home.
Some of the most common reasons for failing affordability tests include having a drop in income, being self-employed, having a poor credit rating and going into negative equity. But there are steps you can take if you've been turned down for a mortgage or remortgage.
Bear in mind that if you don't take action, you'll be put onto your mortgage provider's SVR. These tariffs tend to be significantly higher than the rates on other types of mortgage.
Speaking to a qualified adviser can help you understand why you may have been turned down for your mortgage, and help you plan what to do to get accepted.
This can include checking over your application for any mistakes or missing information, as well as steps to help you pay off any debts and improve your credit score.
There's no guarantee you'll get the best deal with your current provider, so shop around – just make sure you don't end up with multiple 'hard' credit checks, as this could negatively impact your credit score.
If you've spoken to an adviser, and still can't decipher why your application was rejected, you can appeal the provider's decision.
This process tends to be complex and may not be the best course of action unless there was an error on your application. Otherwise, an appeal is unlikely to change the outcome of the lender's decision. You should therefore only consider this option if you know there was important information that wasn't considered by your lender.
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