UK mortgage rates are skyrocketing – what can you do? | Mortgage rates
Rates on new mortgages continued to climb this week as the fallout from the mini-budget continued to trickle down to the housing market. The higher rates on offer are bad news for first-time buyers and those looking to remortgage, who face much larger monthly payments. So how bad are things and what can you do?
So what happened this week?
Most of the mortgage lenders who actually pulled down the shutters following the financial turmoil caused by the September 23 mini-budget have now re-entered the market. For example, NatWest restarted trades on Monday, Barclays on Tuesday and Halifax on Wednesday.
But while some hoped the government’s 45p tax U-turn on Monday and the slightly calmer market conditions that followed might translate into new slightly cheaper fixed-rate mortgage deals, that has yet to happen. In fact, this week new mortgage products continued to get even more expensive. The new two-year average fixed rate – which was 4.74% on mini-budget day – was at 5.75% on Monday and Friday had climbed to 6.16%, according to data firm Moneyfacts. It was a similar story with five-year corrections, with the average rate on Friday standing at 6.07%.
But you can get better rates than these averages. At the time of this writing, the Halifax was offering new two-year fixes for those paying back from 5.06%, with rates on five-year fixes starting at 4.46% – so a bit more down. However, deals are coming and going with remarkable speed right now.
The rise in average mortgage rates may partly reflect the fact that the government’s U-turn only happened on Monday, so – taking an optimistic view – lenders will need some time to react properly. They are under pressure to cut rates on their new products after Chancellor Kwasi Kwarteng met with banks on Thursday, and if financial markets continue to stabilize that will obviously help.
Some brokers have predicted that lenders will start cutting rates over the next week or fortnight, assuming markets remain relatively stable.
How Monthly Costs Are Skyrocketing
Take the example of someone who, in October 2020, took out a two-year fixed rate contract at a price of 1.59% (a pretty good rate then). It’s a £200,000 repayment mortgage over 25 years. They repaid £808 per month. Let’s say they now pay off at a two-year solution in Halifax at 5.06% (we’ll now assume £190,000 and 23 years remaining, but everyone’s situation will be different). Their new payment would be £1,166, or an additional £358 per month. They would actually be better off, financially speaking, by taking Halifax’s new five-year fix, which is a bit cheaper at 4.46%, because then the new payment would be £1,102.
What is the best advice?
For those who will need to remortgage at some point, it clearly depends on when your current contract ends. It is estimated that around 300,000 borrowers exit a fixed rate agreement every three months.
However, many who are worried about the current situation have agreements that may not expire for a year or more.
Mortgage broker Private Finance says it encourages those with a fixed rate with a term of 18 months or less “to get in touch and consider your remortgage options now.” Discussing your options with a broker is definitely a good idea at this time.
The obvious problem is that we don’t know if mortgages are going to get more expensive or cheaper over the next few months.
Some people will wonder about bailing out their current deal early and grabbing another one now, before prices rise even higher. However, most fixed rate products carry an early redemption charge (ERC) during the initial fixed period, sometimes amounting to thousands of pounds. Plus, of course, you leave a low rate early and upgrade to something more expensive.
The good news is that many mortgage offers are valid for up to six months.
So one option is that owners whose existing deals still have some way to go but who are worried could hedge their bets by booking a deal now and waiting to see how things play out. If home loan rates have fallen, you are not committed to the mortgage offer. If rates have risen further, then you can do the math to see how much money you would have to pay to exit your current offer versus what you could theoretically save by signing up for the offer rather than ‘by paying a higher rate. . But it is not a simple matter.
David Hollingworth of broker L&C Mortgages says that rather than hoarding money to pay an ERC, you might be better off using that money to try and reduce your current mortgage debt.
He adds that if you’re sitting on a low rate and have the funds, you can start putting some money aside in a savings account now, ready for when your monthly bill goes up – the rates savings are much better than they were – or, alternatively, you could overpay your mortgage, although there are limits on how much you can pay back.
Obviously, borrowers also have the option of upgrading to something like a follow-on agreement, but with expectations of multiple base rate hikes to come, any initial benefit could quickly evaporate.
For first-time borrowers, this is clearly a very difficult period. Much depends on whether, and how much, house prices fall. Some brokers warned this week that 95% low-deposit mortgages could be the next victim of financial uncertainty due to the risk of homebuyers ending up with negative equity. Some fear that the number of transactions will be reduced; others that they might disappear completely for a while, as happened during the first months of the coronavirus pandemic in 2020.
Are lenders withdrawing offers?
Chris Sykes of Private Finance says: “There is no need to panic about the current situation in terms of cases where the offer has been accepted, as long as the mortgage application is in place. There has been a lot in the press about lenders making offers; however, this is not the case for normal residential transactions, which will be the vast majority.
“There have been very few examples of lenders pulling rates for clients after the request. The only examples of this are in unregulated trading and BTL [buy-to-let] loan conditions.
What else can I do?
In these difficult conditions, with everyone a little nervous, one of the key things for mortgage seekers – especially first-time buyers – is to make sure your credit report and finances are in as good shape as possible.
Ideally, get a copy of your credit report from one or all of the credit reference agencies (the main three are Equifax, Experian and TransUnion) before you apply, go through it carefully and, if possible, take action. required. Pay off outstanding debts and see what you can cut from your expenses.
“Borrowers should be careful in difficult times because something as small as getting a CCJ [county court judgment] refusing to pay a £60 parking fine or missing payments on utility bills after leaving a property can affect the lenders available to a borrower and affect their interest rates if they were recent and have little other credit presence,” Sykes says.