Tomorrow’s Bank of England will be the center of attention as it considers raising interest rates for the first-time in over three years.
This would signal the end to ultra-cheap loans, and increase the cost of millions upon millions of mortgages.
Since March 2001, when the pandemic began, the bank’s base rates have fallen to a record low of 0.1%.
Mortgage misery: But as prices and taxes rocket, homeowners can still take huge strides to reduce the cost of their largest household bill
The bank unanimously voted in favor of a reduction from 0.25 percent to protect households from the economic havoc Covid-19 would soon cause.
However, inflation is expected to rise above 4 percent and rates will likely need to go up to stop spiralling prices. In anticipation, many major banks and building societies have pulled scores of the best deals from the market.
At the beginning of last week, there were only 82 mortgages priced at a rate less than 1%. According to analysts Defaqto, there were only 22 mortgages left yesterday. However, even though prices and taxes have risen dramatically, homeowners can still make great strides to reduce their largest household bills.
Money Mail explains everything you need to know about the impact of a rate increase on you and when it is worth sticking with or turning your back. . .
Tracker tears?
According to UK Finance, around 850,000 borrowers are currently on tracker mortgages that follow the base rate.
Lenders must give borrowers at the base rate one month notice before they adjust their repayments.
Do not wait! Experts suggest homeowners consider switching six months before the term ends. Most lenders will allow homeowners to reserve a deal at this point.
Tracker deal households will not see an increase in their costs if the base rate goes up. The average rate for a tracker agreement is 2.45 percent.
If the base rate was hiked to 0.25 per cent tomorrow, it would increase repayments on a £150,000 loan taken over 25 years by £12 a month from £669 to £681 — £144 a year — according to analysis by AJ Bell.
If base rate rose to 0.75 per cent by the end of 2023, the same mortgage would cost £719 a month, an increase of £50 a month or £600 a year.
And if the Office for Budget Responsibility’s (OBR’s) worst case scenario occurs, where base rate climbs to 3.5 per cent in 2023, the same monthly bill would be £962 — a £3,516 a year jump.
David Hollingworth, of mortgage broker L&C, says: ‘Not all trackers tie the borrower in, so homeowners may have an option to jump ship without a penalty and lock into a fix if they are nervous about what the future movement of rates could have in store.’
Variable fright
Standard variable rate households are subject to the Bank of England and lenders.
According to Jane King (a mortgage adviser at Ash-Ridge), this means that the rates of the 1.1million homeowners who signed these deals could go up faster than any base rate rise. Lenders must still give a month’s notice to alter repayments.
Higher costs: Borrowers who remain on standard variable rate agreements could miss out on savings of hundreds of pounds per month
When the fixed-term ends, household members are automatically rolled onto higher-priced standard variable rates. Borrowers who do not cancel these deals could lose hundreds of pounds per month.
AJ Bell figures show households on Barclays’ standard variable rate are paying 4.59 per cent in interest — £841 a month on a £150,000 loan.
If this rate rose in line with the OBR’s worst case scenario, repayments could increase to £1,157.
HSBC offers the cheapest two year fix on the market at 0.99 Percent for borrowers with a deposit of 40 percent.
Switching from Barclays’ standard variable rate could bring down monthly payments to £565 — a £5,625 saving over two years after the £999 fee is taken into account.
However, thousands of homeowners remain locked in these high rates after the financial crisis.
This means that’mortgage inmates’ could face even more difficulties if interest rates rise again or they are unable switch to a lower deal.
Campaign group UK Mortgage Prisoners’ Rachel Neale says that she knows of people who are on standard variable rates of as high as 10% and any rate increase could make the difference between someone losing their home or keeping it.
‘It’s a devastating time for mortgage prisoners, some of whom are living off just £300 a month once their repayments are made.’
Tightening up
Due to competition, historically low rates have been combined with generous lending. Several large lenders recently announced they would allow wealthy homebuyers to borrow five-and-a-half times their income — a record high.
The cost-of-living crisis will also impact how much homeowners can borrow. Lenders may adjust their affordability calculators.
Income checks: Lenders may adjust their affordability calculators in response to the cost-of-living crisis.
Halifax has already tightened its belt. Last month it began insisting borrowers earn at least £40,000 to borrow more than 4.49 times their income — up from £30,000. HSBC made the same change in September for those who want to borrow 4.75x their income.
Even though smaller deposits are more common, borrowers with 15% deposits have the most options. These rates are already high, so lenders have more to work with.
Robert Payne is the director of Langley House Mortgages. He said that ‘Lenders are now far more comfortable accepting self-employed applicants with low deposits, because the impact of Covid has been more measurable and predictable, and they have had time for criteria to evaluate individual circumstances.
However, first-time buyers may be more affected if the market changes because they already pay more.
Scramble to fix
The best rates are rapidly disappearing. Ulster Bank is currently the only lender offering a five year deal below 1%.
Even though many of the best deals are gone, average interest rate have barely risen and they remain very low.
Two-year and five-year loans have only increased by 0.04 percentage points to 2.29 per cent and 2.59 per cent respectively in the past month, according to Moneyfacts.
Race against the clock: Brokers claim they have been overwhelmed with calls and emails from families looking to lock in a low fixed rate.
HSBC’s lowest two-year rate at 0.99 per cent is only 0.2 percentage points more expensive than the cheapest ever offered.
Brokers report that they have been overwhelmed by calls and emails coming from families wanting to lock in a low fixed price. Many are switching to longer-term fixes over two-year contracts.
Emma Jones, managing Director of Alder Rose Mortgage Services says: “It is clear that people are acutely aware that rates will rise pretty soon.
“Most of our deals that we are switching people are five-year deals. At the moment, not many homeowners are interested to sign up for two-year agreements.
NatWest is offering the cheapest five-year rate at 1.13 per cent, with a £995 fee. This would fix monthly payments at £574 for a household with a £150,000 mortgage and 40 per cent deposit.
We acted quickly to grab a bargain
Michelle Davison: Early switch
Michelle Davison was determined to secure a new fixed rate deal with Gary, her husband.
The couple from Newcastle upon Tyne have a loan of around £110,000 and were paying £676 a month for their 1.64 per cent two-year fix with Nationwide.
They feared that rates would rise if they remortgaged, as the deal was due to expire in February.
After logging into their online account, they discovered that they could move their home loan up to three months earlier than expected.
The family have switched to a 1.09 per cent two-year deal with the same lender, cutting monthly repayments to £647.
Michelle, 36, who runs a toy business, says: ‘We were so relieved that we wouldn’t have to pay the 2 per cent early repayment fee and could still lock into a cheap deal.
‘With council tax and energy bills all set to rise, we just wanted to make sure we had fixed our mortgage payments.’
Many borrowers prefer to pay their mortgage payments for ten or more years. Virgin Money offers the cheapest rate for ten years at 1.95 percent. The same household on this deal would pay £632 a month.
However, those who decide to stay longer should be aware of any expensive early exit fees that may apply if they need to move before the term ends.
Habito offers the longest-fixed deal on the market: a 40-year home loan at 4.65 per cent or £686 a month with a £150,000 loan. There are no exit fees if you leave the online lender’s long term mortgages early.
Break the contract?
According to UK Finance, 1.5 million fixed-rate agreements will expire next year. It is a good idea to switch six months before your term expires. Most lenders will allow you to reserve a deal at this point.
Nick Mendes is a mortgage technical manager at John Charcol. He says that if rates were to continue to fall between now, and then, you might consider switching to a rate at a lower time with the lender. It’s a win/win situation.
Fixed deals that are more than six months away may be worth switching to early. For most people, however, any savings will be erased by penalties of up to 7% on the loan.
Dominik Lipnicki, from Your Mortgage Decisions, said that he has a client that is considering leaving his five year deal 20 months early.
It means he would have to pay a hefty repayment charge of 4 per cent — around £30,000 on his £750,000 loan. He believes that the security that a ten year deal can offer is worth it.
Mr Lipnicki said, “We expect to see far greater people switching out fixed deals early. . . Some may consider early repayment charges.
Overpay for play
With savings interest rates at an alltime low, it might be worth investing your spare cash in overpaying your mortgage.
Because mortgage costs are still low, more borrowers can afford higher monthly payments. Santander says borrowers have cleared an extra £1.3 billion of mortgage debt this year.
Overpaying just £3 a day on a £250,000 loan at 2 per cent could save £7,170 in interest over a 25-year term.
This would cut down on the loan’s lifespan by two years, five months, and save you money. If you could spare £10 a day (£300 a month) you could slash your interest bill by £19,133 and clear your mortgage six years and eight months earlier, according to mobile phone savings app Sprive.
Most providers allow borrowers overpay 10% of the outstanding balance per year without penalty. Keep cash on hand for emergency situations.
Laura Suter, head personal finance at investment platform AJ Bell says that overpaying for your mortgage for shorter periods could be a better option than paying more because you will save on interest.
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