If you are sheltering from rising interest rates within the safety of your fixed-rate, you may also be feeling a little nervous about what will happen when your deal ends. Kate Saines has investigated your options…
Last week’s hike in interest rates to 1.25% came amid warnings the base rate could rise further to as much as 3% by the end the of the year.
Though no one has a crystal ball, and there’s no guarantee our mortgage rates will soar by this much, the predictions are leaving many homeowners feeling a mixture of concern and vulnerability.
Will these rates continue rising into 2023 and 2024? How will this play out for fixed rate deals due to expire in the next couple of years?
At the moment, lenders are increasing the rates on their mortgages to keep up with the Bank of England’s base rate increases.
This is not only the case for tracker and variable mortgages but also new fixed rates. So, anyone remortgaging onto a fixed rate deal now will be looking at average rates of around 3.25% for a two-year fix and 3.37% for those locking in for five years, according to Moneyfacts.co.uk.
But what will happen to these deals over time?
According to David Hollingworth, associate director, communications at broker L&C Mortgages, if fixed rates continue to climb at the same rate as they have so far in 2022, the average of the most competitive of fixed rates could push through the 4% barrier by the end of the year.
This, he warned, could leave borrowers facing borrowing costs at over £200 more per month.
What should we do to avoid being hit by mortgage rate increases?
If your mortgage is due to expire in the next six months, remortgaging now is an option. This is because most lenders will keep your offer live for six months. Therefore, if you were to fix your deal at today’s rates you may find they are much cheaper than November or even December’s average rates.
If your deal has longer than six months remaining and you are due to remortgage in 2023 or even 2024 you may feel resigned to the fact you will eventually – when you come to remortgage – be hit with a much higher rate.
But there are some options for you to consider.
Overpaying your mortgage could take the pressure off future rate rises
One option is to overpay on your mortgage or – if you are limited on how much you can overpay – adding extra cash to your savings.
Alice Haine, personal finance analyst at Bestinvest, explained overpaying would soften the blow of a higher mortgage cost further down the line.
“Alternatively,” she added, “paying down debt or adding an extra monthly sum to their emergency fund would also strengthen their financial reserves against the myriad of challenges ahead.”
This advice was echoed by David Hollingworth, who said: “Make the most of the current rate by looking to overpay a little now.
“This will help reduce the debt before you come to the end of the deal and will also get you used to allocating more of your monthly budget to the mortgage which could be necessary in a higher rate environment in future.”
Would remortgaging early help offset potential interest rate rises?
One option some borrowers with mortgages due to expire in 2023 and beyond may be considering is exiting their deal early and remortgage now.
However, David urged caution to anyone considering this avenue, not least because most fixed rates carry an early repayment charge (ERC) throughout the period which will become chargeable if you switch to a new lender or deal.
They vary from lender to lender so David said it’s important to check the specifics of your product. They can start higher and drop over time eg 5% -in the first year, 4% in the second and so on with the last year’s exit fee being 1%. It could also be charged as a flat percentage throughout.
David said: “To break from a fix usually becomes a question when rates have fallen and borrowers are wondering if they can save money by breaking for a cheaper deal.
“In that scenario it’s a case of crunching the numbers to understand if the savings over the remaining tie in period will outweigh the penalty or if paying the ERC will wipe out those savings.
“In this environment the question stems from the concern that rising rates will mean that current rates will have long disappeared, leaving borrowers facing higher rates.
“That needs to be balanced against the cost of breaking from the current rate, which may now look favourable against the current best rates.
“Unfortunately, there’s no easy way to understand whether that may be the right call without knowing exactly what will happen with rates. There’s a danger you give up on a good rate now, paying a penalty to do so only to find that rates don’t rise as sharply.”
“They could even rise and then ease back if inflation is tamed over time. In short there’s too many unknowns to be able to say that it would make sense to jump.”
[box style=”4″]
Need help to find a mortgage? What Mortgage has teamed up with L&C to offer you expert advice on the right mortgage deal.
Whether you’re buying a new home, remortgaging to a new deal or buying an investment property, L&C can help – and you’ll pay no fee for their advice. To find out more, click here.
[/box]
