More than half of homeowners reach the end of their fixed-rate mortgage in the next three years, and rising interest rates mean many fear they won’t be able to pay their bills.
As mortgage rates continue to rise, pushed up in the first nine months of this year by the Bank of England’s slowly rising base rate and then by the Chancellor’s mini-budget, the impact on household finances could be severe. .
According to Compare the Market, about 55 percent of homeowners will terminate their current fixed agreement and need to remortgage or move to their lenders’ standard variable rate (SVR) within three years.
It comes as the Bank of England has estimated that around 800,000 households will struggle to pay their home loans by 2023, up from around 500,000 last year and the highest level since the run-up to the 2008 financial crisis.
Bigger bill: Rising mortgage costs threaten household finances as borrowers exiting a fixed deal face rate shock
In just over two years, the average rate on a two-year fixed mortgage rose 4.08 percent, from 2.38 to 6.46 percent, according to Moneyfacts.
On a £200,000 mortgage, this means the borrower will pay an extra £460 per month to £1,345, an extra £5,520 per year.
And some may face even steeper increases, as cheapest mortgage rates hit record lows last year. In September 2021, Nationwide posted its lowest rate of 0.87 percent for borrowers with a 40 percent deposit for a fixed two-year agreement.
As a result of these increases, 89 percent of homeowners who will soon be ending their fixed-rate agreement say they are concerned about rising mortgage payments.
And of those, nearly nine in 10 say they fear the increases will affect their ability to pay daily household bills.
The appeal of fixed-rate mortgages is that homeowners can be sure how much their monthly payments will be over the life of the deal.
By locking in a rate, you are protected against future interest rate increases until the end of the fixed period.
Fixed-rate mortgages are traditionally popular with homeowners, and Compare the Market found that 75 percent of those surveyed were in this type of deal.
While nearly three-quarters (71 percent) say they will choose to remortgage when they reach the end of their term agreement, about 15 percent say they won’t.
This could mean they face even higher repayment costs if they move to their lender’s standard variable rate (SVR), which is typically higher than offers offered for fixed-line mortgages.
However, as fixed-term mortgage rates continue to rise, homeowners now face a difficult choice, as some fixed-term transactions have recently risen to a rate higher than the average SVR.
On October 7, the average SVR was 5.44% among the five largest lenders, but the average two-year fixed rate has now reached 6.46%. Lenders can increase your SVR at any time, however,
Alex Hasty, Director of Compare The Market, said: “We understand that this is an uncertain and difficult time for many homeowners, as SVR and term rates rise, the number of mortgage products fluctuates, and the cost of living crisis deepens.” Those who soon reach the end of their fixed-rate agreement are likely to face a major payment shock, even if they are remortgaging.
‘For these homeowners, the best practice is to remortgage rather than switch to their lender’s higher standard variable rate.
“It’s important to compare mortgage products online – checking the deals available now and staying on top of what’s happening in the market will help you budget and save for the future.”
Reduced payments: As a result of rate increases, 89% of homeowners who will soon reach the end of their fixed agreement say they are concerned about their mortgage payments increasing.
You can do this by using the This is Money mortgage finder, powered by broker L&C.
David Hollingworth, L&C Mortgage Expert, added: “Rapidly rising mortgage rates will have taken borrowers by surprise and that is clearly creating significant anxiety as households face a higher cost of living and face large increases in monthly payments.
“Most are willing to lock in their rate so they know where they stand and at least have some certainty about what the biggest single expense is likely to be. As a result, many borrowers are now waiting for their current deal to end, in an effort to anticipate any further increases and secure a deal now.
‘I expect we will continue to see borrowers take the safety first approach to setting their rates. There are still expectations of base rate increases to come that will eventually feed through to the lender’s standard variable rates.
What will happen to housing prices?
Oxford Economics expects mortgage rates to peak later this year but remain high through 2023
Rising interest rates and the resulting impact on mortgage affordability are causing continued uncertainty in the mortgage and housing markets.
On October 10, the Fitch rating agency predicted that the base rate would increase to 4.25% by December 2022 and 5.0% for the following second quarter.
Earlier in the week, analysts at Capital Economics said house prices will fall by around 12 percent by mid-2024 as a result of sharply rising mortgage rates, while Oxford Economics estimates the figure will fall between 10 and 13 percent.
The latest Halifax House Price Index showed UK house prices fell in September, falling 0.1 per cent from August, leading experts to speculate that a market recession is on the horizon. .
A new report from Oxford Economics says house prices are overvalued to the highest level since 2000, when the company began tracking the data.
In 2007, home prices were 25 percent overvalued, the second highest level in the last two decades according to the data. Today, that figure is a much higher 37 percent.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed-rate agreement is coming to an end, or because they have agreed to purchase a home, have been urged to act but not panic..
Banks and building societies continue to lend and mortgages are still being offered and applications accepted.
However, rates are changing rapidly and there is no guarantee that the deals will last and not be replaced by mortgages that charge higher rates.
This is the best Money Mortgage Rate Calculator powered by L&C that can show you offers that match the value of your mortgage and property
What if I need to re-mortgage?
Borrowers should shop around and talk to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed-rate agreement ending within the next six to nine months should consider how much it would cost to remortgage now and consider closing a new agreement.
Most mortgage deals allow fees to be added to the loan and are then only charged when you withdraw. By doing this, borrowers can lock in a rate without paying expensive setup fees.
What if I am buying a house?
Those with agreed home purchases should also aim to lock in rates as soon as possible, so they know exactly what their monthly payments will be.
Homebuyers should be careful not to overstretch themselves and be prepared for the possibility of house prices falling from their current high levels, due to higher mortgage rates limiting people’s borrowing capacity.
How to Compare Mortgage Costs
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 our 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
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