It’s possible that interest rate rises are at a peak, but some experts fear a further deterioration. Either way, it’s crucial to get professional advice well ahead of the time you need to remortgage.
Mortgage borrowers are currently facing more turbulence than at any time since the global financial crisis some 15 years ago. And while there are now some signs that volatility is easing, it is vital that borrowers consider their options carefully – particularly if they are due to remortgage in the near feature.
Today’s difficulties reflect the high levels of inflation seen over the past 18 months, with annual prices rises regularly hitting double digit percentage figures. That has prompted the Bank of England – tasked with hitting an inflation target of just 2.0% – to raise its base rate. Indeed, the Bank has raised this rate 14 times since December 2021, from 0.25% back then to 5.25% today.
Mortgage lenders set their interest rates in line with the Bank’s base rate, so the cost of home loans has also spiked much higher. Borrowers with mortgage rates featuring variable interest rates are already feeling the effects; those with fixed rates are protected for now but will face much higher rates when their current fixed-rate deals come to an end.
The latest Bank of England increase at the beginning of August took base rates back to a level last seen in February 2008, at the outset of the financial crisis. Mortgage rates have risen accordingly – the cost of borrowing today is broadly similar to what was seen in the wake of the disastrous mini budget last Autumn, which caused so much market turbulence. This means rates for even the most competitive 5 year fixed rates are in the low 5%’s while shorter term mortgages are a notable increase on these.
The good news is that we may now be at or close to a peak. In July, the Office of National Statistics published data showing that the headline rate of inflation in the UK had fallen to 6.8%, down from 7.9% in June. That was a larger fall than some economists had expected, raising hopes that the Bank of England’s long run of interest rate increases may finally be coming to an end.
That said, Andrew Bailey, the Governor of the Bank of England, has warned that interest rates are likely to stay higher for longer than the Bank had previously expected, with inflation proving stubborn. Financial markets are still pricing in further rare rises before the end of the year, as the Bank battles to get inflation firmly under control.
Moreover, the effects of the dramatic rise in interest rates we have already seen are only just beginning to work through the system. House prices, for example, have remained relatively resilient, despite reduced demand from buyers faced with an increasing cost of borrowing. In July, Nationwide Building Society said prices had fallen by an average of 3.8% compared to a year previously, though Halifax Bank estimated the reduction was only 2.4%.
The next 18 months will also see some 2.4 million fixed-rate mortgage deals come to an end. For many of these borrowers, the cost of replacement deals will come as a shock, since their existing mortgages were almost all arranged between 2019 and 2021, when interest rates were still at historic lows.
Indeed, around 1 million borrowers will be paying an extra £500 a month by 2026 according to the Bank of England’s analysis. This significant increase in repayments comes at a time when borrowers are also dealing with the cost-of-living crisis – all their household bills have increased significantly.
Taking professional advice on your mortgage options is always a good idea, but in the current market environment, the value of such support is even greater. A mortgage expert will be able to help you keep your extra repayments to a minimum.
It is also worth seeking such advice as early as possible. Mortgage providers will allow you to secure a new deal up to six months in advance of your existing rate coming to an end, but you don’t have to commit yourself. By getting that deal today, you have the option of sticking with it if rates deteriorating further, or seeking a better offer if the market improves. Planning ahead in this way will also give you more time to think about how to cope with the impact of higher repayments.
For any mortgage enquiry, do not hesitate to get in touch with Chase de Vere’s team of expert mortgage advisers.
Content correct at time of writing and is intended for general information only and should not be construed as advice.