How to prepare for a mortgage shock and get a better rate

Hard hit: Homeowners face rate hikes costing them hundreds of pounds

Mortgage rates are rising at a record pace, leaving homeowners at risk of hundreds of pounds higher annual payments than in recent years.

The two-year average fixed-rate agreement is now at its highest level in nine years, and 1.4 percentage points higher than it was in December of last year, according to rate scrutiny Moneyfacts.

But there are steps borrowers can take to avoid the steepest hikes.

What is happening with interest rates?

The Bank of England has been raising interest rates in a bid to curb runaway inflation.

Its base rate has risen from 0.1 percent in November to 1.25 percent today, and is likely to rise again this week. Lenders pass these increases on to customers.

Take, for example, someone with a £200,000 two-year fixed rate mortgage that they took out in the summer of 2020.

If they got the best offer available at the time, they would pay 1.09 percent interest. But by the time they get to remortgaging, the best equivalent rate will have jumped to 2.79 per cent, raising their payment costs by £1,152 a year.

This is Money’s Mortgage Comparison Calculator powered by broker L&C that can help you calculate how much your monthly payments would increase and show you the loans you could take out, based on the value of your home and the size of the mortgage.

What to do: Set your rate now

If you have an adjustable rate mortgage, get it fixed now to protect yourself from future rate increases.

Someone with a £200,000 mortgage where interest follows base rate would have already seen repayments rise by more than £100 a month since rates started rising late last year.

If you already have a fixed offer, plan ahead so you’re ready to lock in the best rate when it ends.

Laura Suter, head of personal finance at investment platform AJ Bell, says: ‘Most borrowers are on a fixed-rate agreement, so until now they’ve been shielded from rate increases.

“However, the big shock will come when their deal is up and they remortgage, then they will face the full effect of all the recent rate hikes in one fell swoop.”

Start looking for remortgage offers a few months before your current one ends. Most mortgage offers are good for six months, so if you must re-mortgage before January 2023, you may be able to get a new offer at current rates.

If rates are lower when it’s time to remortgage, you can ditch the rate you reserved in advance and opt for a cheaper offer.

You can also check your credit score to make sure you’ll be eligible for the best mortgage rate possible.

Do it early and you will have time to improve it if necessary, for example, by joining the electoral roll or challenging any errors.

Consider a green mortgage

Some lenders offer better rates if your home is energy efficient. Virgin Money, NatWest and Barclays offer a competitive rate if your home has a stellar energy efficiency rating certificate: A or B.

Green mortgages are becoming increasingly popular: Internet searches for these products have quadrupled in a year, according to mortgage technology firm Twenty7Tec.

Although green mortgage rates tend to be lower than average, they’re not necessarily the cheapest available, so it’s worth shopping around.

For example, Virgin offers a five-year fixed-rate green mortgage at 3.49 per cent with a £300 repayment. The best five-year solution on the market is 2.78 per cent from Ulster Bank, part of the Royal Bank of Scotland.

Pay more and then get a cheaper loan

Reducing your mortgage debt by overpaying makes perfect financial sense.

David Hollingworth, Associate Director at L&C Mortgages, says: “Borrowers who still enjoy a low mortgage interest rate can pay more now to help erode their balance faster and leave them with a smaller mortgage when their current agreement ends.” .

Overpaying can help you lower your loan-to-value ratio (the loan as a percentage of the home’s value) and make loans available at lower rates.

For example, take someone with a house valued at £283,000. If they had a loan-to-value ratio of more than 65 per cent, they could get a five-year fixed rate of 3.22 per cent from NatWest with monthly payments of £925.

But if they had overpaid so that the loan-to-value ratio was 60 per cent, they could access a lower five-year fixed rate of 3.16 per cent from HSBC, with repayments of £819 per month. Over the full term, they would save £31,699 in interest payments.

how to remortgage

Time flies and with Britain’s favorite mortgages being two and five year fixed rates, many homeowners find their deal is up and it’s time to re-mortgage sooner than they think.

At that point, it’s time to dive back into a mortgage world many of us know little about, and with interest rates rising, it’s important to make sure you re-mortgage right and move to the best possible new fixed rate or another offer.

Read our guide on how to remortgage and find the best rate to find out what you need to know.

Consider changing offers ahead of time

Most fixed-rate and discount-rate mortgages have prepayment fees, making them prohibitively expensive to switch before the deal is up.

However, if you’re not far from the end of your current deal, it may be worth looking at the numbers to see if it’s worth getting out early.

If you’re having a hard time weighing the numbers, a broker can help.

Angela Kerr, director of the HomeOwners Alliance, an organization that provides practical advice to home buyers and sellers, says: “Tell the broker what deal you’re in now, what the early redemption payments are, and they can see if it still makes sense.” to switch now before the higher rates arrive.’

The number of borrowers paying early repayment fees has skyrocketed this year: Yorkshire Building Society, for example, has seen an 88 percent increase in the value of fees paid by its borrowers this year compared to the same period in 2021.

Extend the term of your mortgage

If you’re having trouble with your monthly payments, extending the term of your mortgage will reduce them.

However, the longer it takes to pay, the more interest you will pay. For example, if you had a £200,000 three per cent mortgage, your monthly payments would be £948 over 25 years or £843 over 30 years.

However, you would pay an additional £19,000 in interest payments in total if you opt for the longer term.

You might also consider converting part or all of a repayment mortgage to an interest-only basis.

For example, if you owe £200,000 on a mortgage payment with an interest rate of three per cent, your monthly payments would be £948.

If you were to change it to interest only, the monthly payments would drop to £500. However, you would need to have a plan for how you will pay the mortgage in the future.

best mortgages

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