Homebuyers and homeowners looking for a new loan are facing mortgage woes, with lenders driving up rates and closing nearly 1,000 deals.
In the last two weeks alone, two-year fixed-rate mortgages have become £68 a month more expensive, according to figures compiled for Money Mail. This is based on a £300,000 loan.
It means the cost of a two-year fix bought today is £420 a month higher than a year ago. That costs the average household with a £300,000 home £5,040 more per year.
The more than 1.5 million homeowners facing re-mortgaging this year will be hit by shocking increases in bills, further straining already strained household finances.
So what should you do if your loan agreement is about to expire? Here’s Money Mail’s guide to navigating the mortgage minefield.
Mortgage storm: Lenders make hundreds of mortgage deals to reprice them at a higher rate
What is going on?
Inflation has remained higher than generally expected: 8.7 percent in April. Economists believe the Bank of England will now have to raise key interest rates – currently at 4.5 percent – further than previously expected to 5.5 percent in a bid to curb inflation.
Lenders typically raise mortgage rates in line with the base rate. But with further increases in base rates on the horizon, lenders are pulling hundreds of mortgage deals to reprice them at a higher rate.
On Monday, 4,686 residential mortgage deals were available, up from 5,235 on May 24 when inflation of 8.7 percent was announced.
Santander, Halifax and Leeds all raised lending rates by 0.43, 0.3 and 0.8 percentage points respectively.
The Cooperative and Platformbank withdrew their entire mortgage range at the beginning of this week.
Earlier, TSB withdrew its 10-year fixed rate contracts and increased its two- and five-year fixes by as much as 0.8 percent.
How much will your payments be increased by?
Homeowners trapped in low-cost, fixed-rate loans have so far been protected from higher mortgage rates. But millions of people face a mortgage time bomb when their current deal comes to an end.
If their fixed rate loans end, they could end up paying thousands of pounds more each year.
Inflation battle: Economists think the Bank of England will have to raise key rates – currently at 4.5% – further than previously expected to 5.5%
The two-year average fix increased from 3.25 percent to 5.72 percent last year, according to the scrutineer MoneyfactsCompare.
Borrowers with a typical £150,000 mortgage with an average fixed rate of two years will pay an additional £210 per month, or £2,520 per year, according to figures from broker L&C Mortgages.
Those with a £300,000 mortgage will have to find an extra £420 a month, or £50.40 a year.
Will rates continue to rise?
Mortgage rates are now expected to rise higher before they start to fall.
According to MoneyfactsCompare, the average five-year fixed-rate mortgage rate is currently 5.41 percent.
But forecaster Capital Economics thinks mortgage rates will rise to the level they hit last fall, when five-year deals hit a 15-year high of 6.65 percent.
David Hollingworth, mortgage expert at L&C, warns that any further bad news on the inflation front could trigger another upward spiral in mortgage prices.
Nick Mendes, of mortgage broker John Charcol, says: “Homeowners should be prepared for fixed interest rates to remain around 4 percent for the next two years.”
Should you re-mortgage now or wait?
The best rates are disappearing fast.
Homeowners whose deals expire in the next six months should “act quickly” to secure a new fixed mortgage deal as interest rates rise again, Hollingworth warns.
See exactly when your current mortgage interest ends. Lenders typically allow you to apply for a new rate six months before it takes effect.
Mr Hollingworth says, ‘Buy a deal while you still can. If rates do fall before the new deal starts, you can always look for another loan from the same lender or a new one.
But if rates keep rising, you’ve got a bargain.’
Remortgage woes: On a £300,000 loan, the cost of a two-year fix bought today is £420 a month higher than a year ago
An alternative approach is suggested by Ben Thompson of the Mortgage Advice Bureau. He says, “With interest rates likely to go up before falling, consider getting a new interest rate fix early with your lender.
Many lenders allow you to switch to a new rate three or six months before the official end of your current rate.’
But beware – this can set you up for an expensive rate if mortgage rates start to fall.
Don’t rush a new rate if you’re currently on a cheap deal, because while rates may go up, you’ll likely save more by keeping your current loan. Most lenders will charge you a hefty fee if you break your mortgage before the term expires.
Whether your rate expires in the next few weeks or in six months, speak to your lender and see what rates or deals are available.
How long should you lock up?
IN recent years, homeowners have preferred five-year fixes to make the most of historic loan rates of less than 1 percent. that were offered.
But borrowers have had to rethink their strategy since interest rates began to rise in September last year.
A two-year fixed rate has become more popular because borrowers don’t like to be tied in for too long. Mr. Hollingworth says: ‘The main drawback of this approach is that two-year fixes are more expensive than five-year deals.’
Mr Mendes: ‘A contract for two years gives you payment security for a short period, but if the rates continue to rise, you may have to pay more at the end of the term.
“While a five-year fix provides a longer period of payment stability, it could prove to be an expensive option if interest rates fall over the life of the loan.”
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