Homeowners are being warned to prepare for ‘soaring’ mortgage costs as economists predict rates will rise by as much as 13% in 2023.
Anyone due to remortgage is being urged to take advantage of current low rates as soon as possible because the forecasts suggest mortgage rates will begin rising as soon as next year.
The figures from the Office for Budget Responsibility (OBR) were discovered in documents, released last week, providing more detail on the Budget which was delivered by Chancellor Rishi Sunak.
The public body, which provides independent forecasts on finance and the economy, said it expected mortgage interest costs to begin rising next year before hitting a 13% increase in 2023.
According to Laura Suter, head of personal finance at AJ Bell, the figures showed homeowners needed to be braced for a big leap in mortgage costs to 14% in the first three months of 2023. This would then climb to 14.8% in the second quarter, before dropping to 10.5% by the end of the year.
Laura explained the rise would add £1,260 to an average variable rate £450,000 mortgage and for someone with a £250,000 fixed-rate deal it would add £600 a year to the cost.
Why the rise?
The reason for the rise is down to the Bank of England base rate, which is looking set to start climbing from its 0.1% low very soon.
“Homeowners need to be aware that it’s a case of if, not when, for an interest rate rise now and the clock is ticking on the record low mortgage rates we’ve all become accustomed to,” Laura explained.
“Homeowners on a fixed-rate deal now could face much higher rates when they come to re-mortgage in the coming years.
“Anyone who signed up to a two-year fixed rate deal earlier this year, nabbing a record low rate, will face a stark rise when they come to re-mortgage in the first half of 2023.”
It comes following a period of time in which mortgage rates have hit a record low. Indeed, average mortgage rates have fallen for borrowers across the board, driven down by a flurry of ‘sub-1%’ deals which hit the market in the Spring and Summer.
Fixed-rate deals
But for anyone due to remortgage or buy a property in the next couple of months the advice is to find a fixed-rate deal.
Laura said this would be a particularly good option for homeowners on a tracker deal who believed the OBR estimates that rates would significantly increase.
“Anyone in this position should consider getting a move on, as mortgage rates will start to edge up the closer any rate rise becomes,” she said.
“In a consistently increasing rates environment, the longer you fix the longer you can lock in today’s low rates. However, homeowners need to be careful when thinking about any long-term fixes.
“While, a long-term fix will give you certainty over what you’ll pay and you won’t be caught out by any shock increases, the payoff is that you’ll pay a higher interest rate now than for a shorter-term fix – so you need to be fairly confident that rates will rise during that 10 years.
“But with mortgage rates so low at the moment, there’s never been a better time to get a longer-term fix.”
Watch out for…
Anyone fixing for a longer term deal should also be aware of early repayment charges – these are exit fees which apply if you decide to leave the deal early.
Laura explained this would be a percentage of the amount you have outstanding on the loan. The longer you fix, the higher this fee tends to be.
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