Homeowners with expiring mortgage agreements have faced another troubling week. New home loan costs continue to rise, reaching levels not seen since the 2008 financial crisis.
The Bank of England now says that by next year almost a million households will be unable to pay their home loan due to rising rates. There is also fear of an impending house price correction.
As the cost of living soars and financial markets are in turmoil, this extra burden on households couldn’t come at a more worrying time. But there are steps homeowners can take to protect their finances.
Our House: There are steps homeowners can take to protect their finances
How Much Have Mortgage Rates Raised?
Just a year ago, a two-year fixed-rate mortgage averaged 2.25 percent, 2.55 percent for a five-year deal. Today, the comparable rates are 6.43 and 6.29 percent.
On a standard £200,000 mortgage, a 2.25 per cent loan costs £872 per month. At 6.43 per cent, the monthly cost is £1,341.
Worryingly, more than two million households have fixed-rate offers due next year and are likely to see their payments increase.
How can I check how much I would pay?
The best way to compare mortgage costs and find the deal that’s right for you is to talk to a good broker.
You can use This is Money’s best mortgage rate calculator to display offers that match your home value, mortgage size, term, and fixed rate needs.
Keep in mind, however, that rates can change quickly, so the advice is if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you. .
> Consult the best fixed-rate mortgages that you could apply for
My current mortgage agreement is ending soon, what do I do?
If your deal is about to end, you need to act fast to get a new one. Make sure you have all the required documents ready, such as pay stubs and bank statements.
Lenders are extremely busy: it takes more than four weeks to secure a new mortgage offer. If you stay with your current lender and don’t increase your loans, then the process will go faster by avoiding the need for new affordability calculations.
Once you’ve applied, most major lenders will honor the rate offered first. Specialty lenders may not be as flexible.
What happens if I have six or 12 months left on my loan agreement?
Most mortgage deals last six months, so even if you’re far from having to remortgage, it’s worth starting the process. You can close an offer early to protect yourself against further rate hikes. If the fees then drop, you can file a new application.
However, make sure there are no non-refundable upfront fees and give yourself plenty of time to request a new offer.
What if I am in the process of moving house?
Mortgages are often transferable, so you can borrow on a new property and avoid prepayment fees. If you are increasing in size and want to borrow more money, you may be able to do so with your current lender, but it will likely be at a higher rate.
Can I switch to the interest only offer to lower my payments?
Interest-only mortgages allow you to pay only interest, not reduce the principal. As a result, the payments are lower. But a lender will want you to have considerable equity in your home. They will also want to know how you plan to pay the mortgage at the end of your term.
Another way to reduce monthly payments is a longer-term loan, say 30 years instead of 25.
But borrowing for a longer period means you pay more interest over the life of the loan.
Can I request a moratorium on the mortgage payment?
This should be a last resort. It will only increase the amount of interest you pay in the long run.
If you have a new job that doesn’t start for a few months, it might be helpful to have a forbearance if you find it difficult to meet your current loan payments. If your finances are going to be stretched, it’s best to talk to your lender as soon as possible.
Will I get a cheaper deal if I have more equity in my home?
Mortgages tend to be cheaper the more equity you have. For example, a five-year fixed-rate mortgage with a 90 percent loan-to-value ratio with Virgin is currently priced at 5.48 percent. But HSBC is offering a five-year fix at 5.24 percent for securities loans up to 75 percent.
Should I get out of my current offer, pay a penalty, and secure a new one before rates go up even more?
Some homeowners are giving up their low-rate offers to secure higher ones now, in the expectation that rates will rise further. It is very difficult to determine if this will save money in the long run because there is a lot of uncertainty about the future of interest rates.
If you’re considering upgrading early, be sure to check to see if you’ll be aware of any early refund fees. You must include them in your calculations.
Alternatively, you can stay on your existing agreement and make overpayments, again watch out for early repayment fees. This would reduce the total amount of interest you must pay and get you used to paying a higher monthly amount.
You might also consider saving in a high-payment savings account and using that money to pay off part of your mortgage later.
What about buy-to-let mortgages?
Interest rates on rent-to-own mortgages are rising along with standard loans. This means that landlords will likely have to raise rents for tenants, or take a financial hit themselves. Some owners may well find that they have to sell some of their properties.
We survived at much higher rates in the 1980s, so what’s the problem?
Interest rates in the late 1980s were close to 15 percent, placing a huge financial burden on those with home loans. Today, homeowners have higher debts to pay off because property has become more expensive.
Plus, interest rates have been low for many years, which means the surge is taking many homeowners by surprise.
Should I wait until the Chancellor’s tax return later this month?
Some financial experts hope that when the Chancellor issues his statement, the current volatility in financial markets may subside. However, there is no guarantee that this will be the case, or that it will result in lower borrowing costs.
Adjustable rate mortgages are available for borrowers who think interest rates will not go as high as expected.
But if they’re wrong and mortgage rates rise even higher, they’ll face higher monthly payments. A risky approach.
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