Interest rates on mortgages had already been climbing throughout 2022, rising steadily as the Bank of England lifted the base rate of interest to try to counter the growing threat of inflation. But when the financial markets reacted negatively to September’s mini-budget, what had been a relatively gentle uptick in mortgage costs quickly gave way to sharp rises, with the potential to add hundreds of pounds on to monthly repayments almost overnight.
Indeed, in the weeks immediately after the mini-budget, typical mortgage rates soared to levels not seen since the financial crisis in 2008. According to financial data firm Moneyfacts, the average two-year fixed-rate mortgage had been 4.74% on the day the then Chancellor Kwasi Kwarteng first announced his plans to the House of Commons; around a month later the average rate on the same typical mortgage had increased to 6.55%. Although some lenders have been tentatively lowering these same fixed rates since Rishi Sunak replaced Liz Truss as Prime Minister, they still remain significantly higher than in mid-September.
Rubbing further salt in the wound, this uncertainty saw lenders quickly pull large numbers of mortgage products from the market. While some have since returned, a month on from the mini-budget the number of available mortgages overall totalled just over 3,000, around 900 fewer than immediately before the fiscal event.
What can mortgage borrowers do?
How the recent upheaval in the mortgage market might affect borrowers depends mainly on the type of mortgage they have and when any deal they’re locked into is due to come to an end. Some of the scenarios that homeowners will be facing and the options they might want to consider include:
If your fixed rate ends soon
When borrowers have a fixed-rate mortgage that is coming to an end, the choice is usually between moving to the lender’s standard variable rate (SVR) or remortgaging.
Heading to the SVR could be an easy option but it might not be the best. The rate is generally higher than the one that is being left behind, and lenders have the discretion to increase it when they want – something which has been happening regularly of late.
Remortgaging can avoid this, and as some mortgage offers will last for up to six months, this can be lined up before an existing deal ends. However, given how far and fast mortgage rates have increased generally since the mini-budget, the fear for most who want to remortgage is that they’ll have little choice but to accept a higher rate than they’ve been paying, and their monthly mortgage payments will rise as a result.
It’s a position with which Nick Chadbourne, CEO of conveyancer LMS, has sympathy and one that he believes requires swift action by affected borrowers: “It’s understandable that people are concerned about their mortgage payments, especially if their product is set to expire in the next six months.
“Be aware of when your early repayment charge expires and act in advance. This will give you plenty of time to consult a broker and lock in a rate that suits you (ideally locking in a lower cost deal for longer) rather than sticking with a default product transfer, or worse, dropping on to your lender’s standard variable rate.”
If your mortgage deal has some time to run
Those with a fixed-rate mortgage that still has some way to run are likely to be relieved that their monthly payments won’t change until it expires, but also wondering how high mortgage rates might be by the time they want to seek out a new deal.
For borrowers who think mortgage rates could carry on rising, one potential option is switching from their current mortgage early to secure a new one before rates get too high.
However, the problem here is that no one knows where mortgage rates will be in one or two years’ time, and there’s likely to be early repayment charges to factor into the equation too. It’s a far from easy decision to make and one where seeking financial advice is almost certainly a good idea.
“A good independent mortgage adviser will be able to compare the potential cost of exiting your existing deal in comparison to new rates on offer,” says Stuart Cheetham, CEO of lending platform MPowered Mortgages. “However, with rates going up and with most mortgage products having exit fees, doing nothing might be the right action right now.”
If you have a variable rate mortgage
Those who have a discount or tracker mortgage, or are sitting on their lender’s SVR, will almost certainly have seen their monthly payments rise throughout the year. As an example of the increased outlay they might have faced, if a 25-year term £200,000 capital repayment mortgage with a current interest rate of 2.5% was to rise by 1% to 3.5%, this could add around £105 to monthly payments.
Switching to a fixed-rate mortgage can give peace of mind payments won’t rise for the term of the deal. However, given the general rise in mortgage rates, the price for this certainty could be leaving a variable rate that is actually lower than the fixed rates on offer. Tracker and discount mortgages could have early repayment charges to take into account as well, but expectations for where interest rates might go next, and the ability to absorb future rises in monthly payments, are key.
To this end, Chadbourne notes the mini-budget U-turns have helped stability and encouraged some lenders to return to the market, giving borrowers more mortgage options than in the immediate aftermath of the mini-budget.
“Growing product competition in the months ahead could improve the situation further, but interest rates are still higher than people are used to and borrowers on a variable rate may want to consider remortgaging to lock into a fixed-rate deal sooner rather than later,” he suggests.
If you’re a first-time buyer
For first-time buyers, the challenge of getting on the property ladder has almost certainly become more difficult in recent weeks. Rising interest rates means a mortgage that was affordable before the mini-budget might now be out of reach.
At the same time, lenders’ greater reluctance to take on riskier borrowers saw the number of low-deposit mortgages aimed at first-time buyers more than halve. According to Moneyfacts, the 283 mortgages that were available at 95% loan to value just ahead of the mini-budget had dropped to just 137 around a month later.
The suggestion by some that such mortgages could vanish altogether hasn’t, as yet, come to pass. However, given that every pound tends to count for first-time buyers, a combination of fewer mortgage options, higher interest rates, and a cost of living crisis means that many dreams of homeownership are likely to have been shattered in recent weeks.
“It is unlikely that first-time buyer products will disappear altogether but given the volatile market some lenders have reduced their product range,” adds Cheetham. “Again, independent mortgage advice is key right now so consumers can access all deals on the market and make the right choice for their personal circumstances.”
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