While the government’s announcement about capping energy costs will have been welcome news for many last week, it’s still going to leave millions of people significantly out of pocket. Not only that, but interest and mortgage rates are rising at an astonishing rate too.

That may not be so bad for those in the middle of a longer-term fix (five or more years), but for those who bought in the early days of the pandemic, that could become a serious problem over the next twelve months.

The Bank of England has just increased the base rate by another 0.5 percentage points. The immediate impact is felt by homeowners on variable rate mortgages such as trackers, discounts, or offset mortgages, but it does mean that first-time buyers and those looking to remortgage are seeing rates rise week to week as mortgage lenders juggle their figures and try to work out what a good market rate should be.

This also means that reversion rates have also gone up – the rate you pay once your fixed-rate deal ends. While not directly affected by the base rate, as a rule of thumb most lenders increase it by the same amount as the Bank, meaning that many standard variable rate (SVR) deals are now hovering around the 5% mark, whereas a year ago it was nearer 4%.

James Coney told The Times: “The historic low loan deals that buyers were blessed with for the past 12 years have been swept away by six Bank of England base rate rises so far this year”.

According to finance website Moneyfacts, you could get a two-year, fixed-rate mortgage at an average rate of 2.24% in 2020. That’s just the average; for those with bigger deposits, greater equity (and a decent credit score), you could get mortgage deals at less than 1% right up until summer last year.

The situation is now far different, with a two-year fix costing on average 4.09% with reversion rates and SVRs at 5% or more. To put that in context, someone who took out an average two-year fix two years ago on a £500,000 home will now need to find an extra £500 a month if they take the average now available.

Melissa Lawford told the Telegraph: “We are facing the worst mortgage shock since the 1980s,” adding that the rapidly rising rates are a “financial disaster for those remortgaging next year”.

Remortgaging now if you’re able is likely a wise move at the moment. Most lenders will allow you to lock-in and secure a rate up to six months before your current deal ends. Given how rates have risen in just the last six months, that’s likely not a bad idea. Experts predict things are only going to get worse for the next year or so with the base rate hitting 3%.

Lawford added “Analysts expect the Bank Rate to climb further – to 3% next year. The average rate on a two-year fixed deal for a buyer with a 25% deposit would then jump to 4.88%, according to Hamptons. This would be four times the rate at the end of 2021.”

What To Do With Your Mortgage?

The short answer is to remortgage now if you can – six months is a long time in finance and economics and, depending on the state of the economy and the markets, rates could easily increase by another 3% in that time.

Overpayments

Overpaying could also be a good option if you have the funds to spare. David Hollingworth from L&C Mortgages says: “Borrowers who are still enjoying a low mortgage interest rate can overpay now to help erode their balance more quickly and leave them with a smaller mortgage when their current deal ends”. Spend a little now, save a lot more down the line.

Extend the term

Another option might be to extend your mortgage term. In some ways, this is the opposite of spending now to save later. This is saving now and, by increasing your term from 25 years to 30 years (for example) you’ll be paying an additional five years of interest which could add up to quite the sum. Nevertheless, it can reduce your monthly outgoings and the last thing you want to do is start registering missed mortgage payments on your credit score or losing your home.

A £200,000 mortgage, for example, would cost £948 per month over 25 years. At 30 years that drops to £843.

Research carefully, but act quickly.

The shelf-life of mortgage products can vary dramatically. Good deals can appear and disappear in under a week, in some cases they barely last 24 hours as the markets change. There is also a huge backlog of applications as people try to secure a better rate before rates go up again. Get all your paperwork in place and then be ready to move on a deal before it disappears.

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