Rising interest rates are a serious worry for homeowners, many of whom are likely to face a sharp jump in mortgage costs when they come to remortgage.
The Bank of England voted to raise rates again in June, the fifth consecutive increase since December. Following May’s base rate increase, the average overall two-year fixed rate rose above 3% for the first time in over seven years, according to financial website Moneyfacts.co.uk, reaching 3.35% this week. The average five-year fixed rate jumped to 3.17% following May’s rise, its highest level in six years, and currently stands at 3.46%. Rates are likely to climb higher in weeks to come following the latest rate rise.
Ross Boyd, founder of the mortgage comparison platform, Dashly.com said: “Fortunately, many homeowners are on exceptionally low fixed rates and that will support their ability to maintain payments. It's what happens when they come to the end of their fixed rates that matters now. Many will be in for a serious rate shock if rates continue to rise, something that will be exacerbated if inflation is still well above target."
Here are some of the things you might want to consider if you’re facing much steeper mortgage costs when your current deal finishes.
1) Start your re-mortgage search early
You don’t have to wait until your current mortgage deal finishes before you start looking for your next one. You can usually secure your next mortgage up to six months before your current mortgage ends, enabling you to take advantage of competitive rates while they are still available.
David Hollingworth, associate director at L&C Mortgages said: “The market is moving at breakneck speed as lenders try to manage their product ranges and lending volume, often resulting in products lasting days rather than weeks. That presents a real challenge for borrowers trying to keep on top of market movements but with continuing increases in mortgage rates it’s all the more important for borrowers to keep a tight rein on their mortgage.”
2) Consider a fixed rate deal
If you’re currently on a variable rate mortgage deal and worried about interest rates rising further, when you remortgage you may want to consider locking into a fixed rate mortgage for the next few years. That way you’ll have peace of mind your mortgage payments won’t go up even if interest rates continue to rise.
Think carefully before you lock into a very long term fixed rate though, for example, a 10-year fix, especially if your circumstances are likely to change during this period. Adrian Lowery, financial analyst at DIY investing platform Bestinvest said: “If you are intending to move in the coming few years, your fixed-rate mortgage may well be ‘portable’ to your new property, but you will be restricted to your current lender for any extra borrowing you might need if you are upsizing.”
3) Overpay if you can
If you’re currently on a low rate which isn’t due to finish for a while yet, it may be worth trying to overpay your mortgage if you can afford to. This will help reduce the amount you owe, which should hopefully mean less of a payment shock if you have to remortgage to a higher rate when your current deal ends. Most lenders will allow you to overpay up to 10% of your mortgage penalty-free each year but check the terms of your specific deal.
4) Consider lengthening your mortgage term
If you’re going to struggle to cover your mortgage costs when you remortgage, you might want to think about opting for a longer mortgage term to help reduce the cost of your monthly mortgage payments. Bear in mind though that this will mean you pay much more interest overall, so you should aim to reduce your term again as soon as you’re on a stronger financial footing.
5) Seek advice
A mortgage broker can talk you through all the options that are available to you and help you find the best deals based on your individual circumstances, so if you’re approaching the point you need to remortgage, it’s a good idea to seek advice sooner rather than later. Remember that moving from your existing deal onto your lender’s standard variable rate is likely to be the worst thing you can do, as the standard rate is usually much more expensive than other mortgage rates. That means you should aim to have your next deal ready to move straight onto when your current mortgage ends.