Mortgage shock as bargain fixed rate deals vanish: Rates have risen rapidly in just six months, so what can you do if you need to fix this year?
Homeowners have had the luxury of cheap mortgages for more than a decade. But the era of rock-bottom rates looks to be officially over.
Last year’s record low deals of less than 1 per cent are long gone and rates are nearly twice what they were six months ago.
Homeowners could borrow at 0.79 per cent in October, but now the cheapest two-year fix on the market is 1.25 per cent. The increase adds £375 to the annual cost of a typical £150,000 loan.
The lowest five-year fix has also risen from 0.91 per cent to 1.59 per cent – an extra £565 a year.
Borrowers have enjoyed low interest rates since the Bank of England base rate plummeted after the financial crisis. It fell to a record low of 0.1 per cent when the pandemic struck in March 2020, but has risen to 0.5 per cent and is likely to be hiked again this month as inflation soars.
And lenders have been quick to raise their own rates. Last week several banks, including Santander, Halifax and Virgin Money, increased fixed-rate deals by up to 0.5 per cent.
Interest rates are expected to keep climbing and could hit 2 per cent next year — a level not seen since December 2008. It means those on ultra-cheap deals are in for a nasty surprise when they renew their mortgage.
We look at how borrowers can protect themselves from a shock.
Bargain basement fixed rates have vanished
Two years ago you could borrow £150,000 for 25 years at a rate of less than 1 per cent for two or five years, costing around £565 a month. Now, the average two-year fix deal is 2.6 per cent and a five-year deal is 2.87 per cent.
Mortgage broker Imran Hussain, at Harmony Financial Services, says: ‘The sub-1 per cent interest rate is almost certainly a thing of the past.’
If the Bank of England raises the base rate to 2 per cent next year, a £150,000 loan would cost £711 a month on a two-year fixed deal. A five-year fix would cost £723 a month.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, says: ‘Those who were lucky enough to secure a fixed rate at the historic low rates we saw last year have to be aware of what lenders call ‘payment shock’, which is when rates rise while you are insulated on your fixed rate and exit that deal into a much higher interest rate market.
‘All you can do is ensure you budget with a reserve to allow for an increase in payments when your deal ends.’
End of an era? Homeowners could borrow at 0.79% in October, but now the cheapest two-year fix on the market is 1.25%
If you can lock in now, it could be wise to fix
Around three-quarters of borrowers are locked into fixed deals that last from one to 30 years.
Others are on variable deals that change when rates rise or fall. Borrowers on the average standard variable rate of 4.5 per cent will face extra repayment costs of £1,592 a year on a £150,000 loan if base rate hits 2 per cent.
But what can those on a fixed deal soon to expire do now?
Mortgage brokers urge those who can to lock in to a fixed deal before rates rise any further.
David Hollingworth, of L&C, says: ‘Taking advantage of the current crop of deals will help to weather the storm.’
He says some lenders will issue mortgage offers that are valid for up to six months, meaning you can secure a deal now.
Consider a long-term fix
Five-year fixed deals have become more popular as prices have not been far off shorter-term deals.
Yet more borrowers are now looking to lock into ten-year deals. The best ten-year remortgage rate is currently 1.66 per cent with Lloyds.
Dominik Lipnicki, director at Your Mortgage Decisions Ltd, says: ‘Many borrowers are not just concentrating on the lowest possible monthly payment now.’
Graham Cox, director of Self Employed Mortgage Hub, adds: ‘We’re finding borrowers who aren’t looking to move locking in on a longer period of five or seven years.’
But Mr Hollingworth warns that long fixed deals are not always suitable, especially if you have to move: ‘Although they will be portable, there is no guarantee you will meet the lender’s criteria then.’
Can you overpay your way to a cheaper mortgage?
Many mortgage deals have an early repayment charge, but typically allow borrowers to pay back up to 10 per cent extra every year penalty-free.
Overpaying by £100 a month on a £150,000 loan at 1 per cent would save £3,374 and help you clear the loan more than four years early.
But borrowers should always consider if there are more expensive debts to pay off before overpaying.
Mr Hollingworth says: ‘Although the cost of living rise will cause many to rethink their budgeting, there could still be room for some overpayments to be made now while enjoying a low rate.
‘That will help reduce the interest bill and the mortgage balance to save money overall and to put them in a better position to cope with a potentially higher-rate environment when the current deal comes to an end.’
Is it worth paying to leave early?
It may be worth the cost of an early repayment charge (ERC) to lock into a cheap deal before rates rise.
Samantha Bickford, managing director at The Mortgage Girl, says: ‘A client on a great rate of 1.79 per cent with a year left came to me this week willing to repay the £700 exit fee to secure a new fixed rate deal for as long as possible.
‘We secured a deal at 1.89 per cent for the next five years, to take him to the end of his mortgage term.’
But experts say rates are still very low and are unlikely to surge.
Rob Peters, principal at Simple Fast Mortgage, says: ‘We have had an unprecedented period of all-time low interest rates. Those with highly leveraged debt burdens will be the first to feel the pain.’
Article sourced from This is Money 10th March 2022. Original full article can be viewed by clicking link below
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Mc Daid Mortgages do not accept responsibility for any advice provided or opinions expressed with this article. This is for information purposes only
Your home may be repossessed if you do not keep up repayments on your mortgage
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