As a result of the fallout from the mini-budget, interest rates on new mortgages continued to rise this week. For first-time buyers and those looking to remortgage, the higher rates mean much higher monthly payments. What can you do about the situation?
Mortgage lenders have now re-entered the market following the financial turmoil caused by the 23 September mini-budget. On Monday, NatWest relaunched deals, on Tuesday, Barclays and on Wednesday, Halifax.
The government’s 45p tax U-turn on Monday, coupled with the slightly calmer market conditions that have followed, had raised expectations for slightly cheaper mortgage rates, but this has not been the case. There has been an increase in the cost of new mortgage products this week as well. According to Moneyfacts, the average new two-year fixed rate, which was 4.74% on the day of the mini-budget, climbed to 6.16% by Friday, up from 5.75% on Monday. On Friday, the average rate for five-year fixes stood at 6.07%.
In an optimistic view, lenders will need a little time to properly respond to the government’s U-turn because it only occurred on Monday. As a result of the chancellor’s meeting with banks on Thursday, they are under pressure to reduce their new product rates, and if the financial markets continue to stabilize, that will certainly help.
If the markets remain relatively stable, some brokers predict lenders will begin trimming their rates over the next week or two.
How should I proceed?
There are many factors to consider if you plan to remortgage at some point in the future. Every three months, about 300,000 borrowers exit fixed-rate deals. Those concerned about the current situation may have deals that do not expire for another year or two. We don’t know whether mortgages will become more expensive or cheaper over the next few months, which is obviously a problem.
People may wonder if they should bail out of their current deal early and grab another one before the prices rise even further. It is worth noting, however, that most fixed-rate loans have early repayment charges during the initial fixed period, which can amount to thousands of pounds in some cases. In addition, you are leaving a low rate early and moving to a higher rate.
Fortunately, many lenders give six-month mortgage offers.
In that case, homeowners who are concerned about their existing deals but still have a way to go could hedge their bets by reserving a deal now. A mortgage offer is not binding if interest rates have gone down. Alternatively, if rates have risen even higher, you can do the math to see what you would have to pay if you quit your current deal early versus what you might save by signing up for the offer deal. However, that is not an easy task.
If you’re considering switching mortgages, here’s what you need to know:
1. Check out what types of rates are available. Money Saving Expert.com has a mortgage comparison tool that lets you see what’s available and compare it to what you’re currently paying. If you’re thinking about switching, keep in mind that rates are changing quickly.
2. Take a look at your current mortgage. If savings appears possible, then dig out the details of your current mortgage, as it’s time to get serious…
– What’s the rate? Plus monthly payments & outstanding debt.
– What type is it? Is it a fix, tracker or SVR?
– When’s the intro deal over? For example, when does your fix end?
– When must it all be repaid? In 10, 20 or 25 years?
– Will you be penalised to switch deals?
3. Make sure you are getting the best deal from your existing lender. A ‘product transfer’ occurs when you get a new deal with your existing lender. Compare the rates it is offering online – or speak to a mortgage broker – and use this as a benchmark. According to brokers, product transfers are becoming more common, because they are easier to get accepted, and they may have lower fees.
4. Using your savings can help you get a better deal. A remortgage will be cheaper if you can drop an LTV band if your home is still worth over 60%. A real drop in interest rates occurs in the bands between 90%, 80%, 75%, and 60%. A remortgage is well worth doing if you have some money put away, and it won’t leave you without an emergency fund.
5. Consider whether you want a fix or a tracker. You should hedge for a fix if you value certainty and being able to stick to a budget. Nonetheless, trackers are likely to be cheaper right now, and if the base rate rises continuously, your repayments may change frequently.
6. Now is the time to talk to a broker – they are more important than ever. Due to the cost of living crisis, lenders’ acceptance criteria have changed at short notice and vary from one to the next. Depending on the lender, overtime or commission might be included in your income assessment, while only your base salary might be considered.
A mortgage broker can help you navigate the maze. Most lenders’ acceptance criteria aren’t easily accessible to the general public, and brokers have access to many deals (even some product transfers) that aren’t available anywhere else.
There is no doubt that it is a challenging time for first-time buyers. House prices will greatly affect whether and how much they fall. Several brokers warned this week that 95% mortgages with a low deposit could be the next casualty of financial uncertainty due to the risk of negative equity for buyers. Many fear that the number of deals could be reduced; others fear that they could cease altogether, as happened during the early stages of the Coronavirus pandemic in 2020.
Especially for first-time buyers, a good credit record and good finances are essential in these challenging times. If possible, obtain a copy of your credit file from one or all of the major credit reference agencies (Equifax, Experian and TransUnion) before you apply, review it carefully, and take any necessary action. Reduce your spending and pay down your debts.
If you are having difficulty paying your bills, you should seek assistance.
Mortgage repayments are becoming more difficult for many homeowners as the cost of living rises. Arrears are the result of missing a mortgage payment. Avoid this at all costs, as it will seriously affect your ability to get credit in the future.
- Consider extending your mortgage term with your lender, so you have more time to pay off your debt, or switching to an interest-only mortgage.
- Mortgage repayment assistance may be available if you’re on certain benefits, such as universal credit
- Get free, one-to-one debt-counselling help – the likes of Citizens Advice, StepChange or National Debtline can help you understand your options, and if you need emotional support, try CAP instead. You may also find the MSE Mental Health & Debt guide useful.