This week, the Bank of England once more raised interest rates in a bid to combat inflation, warning inflation could reach 11% by October. Members of the Bank’s monetary policy committee voted to increase the base rate by 0.25%, taking it to 1.25%.
Mortgage costs and interest rates are rising and if you are one of the 1.3 million mortgage holders due to see their deals end in 2022, it’s important to be prepared and take action now.
Although the ultra-cheap fixed rate mortgage deals have all but disappeared, they are still historically low.
What the rate rise means for mortgages
An increase in the interest rate means that borrowing is more expensive, resulting in less borrowing and more saving. The reason for these rate rises is that with less demand for goods and services, prices fall and inflation will cool.
This latest increase in the Bank of England’s base rate means that over 850,000 people on tracker mortgages and 1.1million on variable deals will see their mortgage rate go up. This accounts for around a quarter of all UK homeowners.
However, most homeowners are currently on a fixed-rate mortgage and won’t notice any changes to their mortgage payments. Those who have a fixed rate deal ending this year, or those with a variable-rate mortgage, are probably wondering if now is the time to remortgage.
If your deal is due to end before December 31st, we would recommend that you start looking now. You can often remortgage within 6 months of your deal ending, but check whether you have any exit fees and determine if these can be offset by any rate rises between now and December.
If you are on your lender’s standard variable rate, you will typically be paying much more than if you were on a fixed rate deal. If you do remortgage, you won’t have any exit fees so it’s worth looking to lock into a fixed deal. According to Moneyfacts a two-year fixed deal is typically 1.66 percentage points cheaper than the average variable rate. Although many lenders have pushed up their variable rate with an average rise of 0.5% percentage points since 2021, not all providers have passed on the rise to their customers.
Moving to a fixed-rate mortgage
At present, the most popular fixed-rate mortgage term is five years, especially as the margin between the average two- and five‑year deal is the narrowest it’s been for nearly ten years.
Ten-year fixed-rate deals are also competitive with rates as low as 2.73 per cent. However, we would advising considering very carefully if you want to be tied in for ten years as you could face large financial penalties if you need to end your mortgage term early. Ten years is a huge commitment.
It’s important when considering whether to end your variable rate deal early to consider how much more you will pay as rates go up again, how much longer your mortgage has left to run and any penalties for leaving. Mortgages that are linked to a lender’s standard variable rate and tracker mortgages can incur early repayment charges.
If you can, overpaying on your mortgage can make a big difference. An extra £30 a month would reduce the interest bill on a £150,000 mortgage taken over 25 years by over £4,500 based on a 3.25% rate. It will also help you to clear your mortgage early and access better rates in the future. You could also consider an offset mortgage whereby your savings are held in an account linked to your mortgage. Rather than earning interest, it is used to reduce what you owe on your home loan.
There are four more Bank of England base-rate announcements this year. The next one is in August, then September, November and December. We can help you check that you’re on the best possible deal and if not, compare the whole market for the most suitable mortgage. Talk to us at The Mortgage Hub for more information and advice.