For the last ten years or so, buyers have enjoyed the luxury of low-cost mortgages, but this long-cherished privilege looks set to end.
2021 showed record-low fixed-rate mortgage deals of less than 1%, but these rates are officially over, with interest rates nearly doubling over the last six months.
In October 2021, home buyers could take out fixed-rate mortgages at a low rate of 0.79%; however, the cheapest you can get right now on a 2-year fixed-term mortgage has risen to 1.25%. In real terms, this would mean that on a loan of £150,000, you could expect to pay an additional £375 annually. The lowest rate on a five-year fixed-term mortgage has risen from a low of 0.91% to 1.59%, which equates to approximately £565 in additional costs per year.
Buyers have enjoyed low-interest mortgage offers since the end of the global recession, when the Bank of England significantly decreased the base rate. When the COVID-19 pandemic struck, the base rate was at a record low of 0.1% but has since been increased to 0.5% with the expectation that it will rise further in the immediate future as the cost of living soars.
As a direct result of this base rate hike, lenders have followed suit with many increasing fixed rates by up to 0.5%, including Virgin Money, Halifax, and Santander.
The expectation is that rates will continue to rise and could go as high as 2% by 2023. The UK hasn’t seen rates this high since December 2008. Those currently on low-cost fixed-rate mortgages will find it difficult to find an equally good deal when their current term comes to an end.
Imran Hussain, the mortgage broker at Harmony Financial Services, commented: ‘The sub-1 per cent interest rate is almost certainly a thing of the past.’
If the rate is increased to 2% by the Bank of England in 2023, this would mean that on a property worth £150,000 on a two-year fixed rate, monthly payments would be £711, and on a 5-year fixed rate, they would be £723.
A financial adviser at Carl Summers Financial Services, Scott Taylor-Barr, added: ‘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.’
Lock in now: If you can
Approximately 75% of buyers are locked into fixed-rate deals that last between one and thirty years. Other homeowners are on variable-rate mortgages and are therefore subject to the rise and fall of interest rates. Should the Bank of England push the rate further to 2%, this would mean a property worth £150,000, with an average standard variable rate of 4.5, would have to pay £1,592 in additional costs per year.
Mortgage brokers are urging homeowners to do all they can to switch to a fixed-rate mortgage before we are hit with further interest rate increases if they can.
David Hollingworth, of L&C, says: ‘Taking advantage of the current crop of deals will help to weather the storm.’
He went on to say that many lenders will make mortgage rate offers that they will honour for up to six months, giving buyers and homeowners the opportunity to get a good deal before it’s too late.
Look into long-term fixed-term deals
Longer-term fixed-rate mortgages are becoming more and more popular, with the cost of a five-year fixed-rate mortgage not being much higher than that of a two-year fixed-rate deal. With this in mind, there is a trend among buyers to consider taking out even longer, ten-year deals. The best deal available on a 10-year deal is currently with Lloyds at a rate of 1.66%.
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.’
He did warn, however, that long-term rates are not always the best choice for every buyer, particularly if they have to move: ‘Although they will be portable, there is no guarantee you will meet the lender’s criteria then.’
Can a cheaper mortgage end up costing more?
A great number of mortgages have an early repayment fee, but lenders usually permit borrowers to repay up to 10% extra, penalty-free, every year.
By paying an extra £100 per month on a mortgage of £150,000 with a 1% interest rate, you could clear your loan almost 4 years early and save around £3,374. Although this may seem like a good move, it is vital that consideration of other debts be made first.
Mr Hollingworth stated, ‘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.’
Should I pay to leave early?
It may be cost-effective to just pay the ERC (early repayment charge) if a low-fixed-interest rate mortgage can be found, but borrowers should calculate whether it is in fact worth it before making any commitment.
Managing director at The Mortgage Girl, Samantha Bickford, 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 relatively low and are not likely 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.’