Homeowners are facing the biggest rise in mortgage payments since the 2008 Financial Crisis after decades of rock-bottom rates, according to official data.
The Office for Budget Responsibility (OBR), the government’s independent forecaster, originally predicted in the 2021 Autumn Budget that the Bank of England would increase the base interest from 0.1% to 0.75% by the end of 2023. However, there have been five consecutive rate rises since December, and as of June 2022, the base rate stood at 1.25%, with predictions from the Bank’s Monetary Policy Committee that it could rise to 2.5% by min-2023 before falling back again.
This will mean that millions of homeowners will see further increases in mortgage costs in the months to come.
Brian Murphy, head of lending at the Mortgage Advice Bureau said: “There are expectations across the market that interest rates will surge even higher this year and homeowners need to be poised for what this means for their finances and their mortgage payments, particularly those on a tracker or variable rate.”
Read more in our article What can you do to prepare for an interest rate rise?
The biggest rise in mortgage rates is expected in 2023, when the cost of paying a mortgage could increase by 13.1%. Homeowners with a £250,000 two-year fixed-rate mortgage at 2.06%, for example, would see their repayments rise by about £600 a year when they came to remortgage in 2023, according to investment provider AJ Bell.
The average two-year fixed rate mortgage has already surpassed 3%, according to analysis by financial website Moneyfacts.co.uk, with those on their lender’s standard variable rate paying an average rate of 4.78%.
Rachel Springall, spokesman for Moneyfacts.co.uk said: “Switching from a standard variable revert rate (SVR) to a fixed rate could significantly reduce someone’s mortgage repayment. The difference between the average two-year fixed mortgage rate and SVR stands at 1.75%, and the cost savings to switch from 4.78% to 3.03% is a difference of approximately £4,611 over two years. A rise of 0.25% on the current SVR of 4.78% would add approximately £695 onto total repayments over two years.”
These examples are based on a £200,000 mortgage over a 25-year term, arranged on a repayment basis.
What can you do about rising mortgage rates?
News of increasing rates will come as a further blow to households who are already battling soaring energy and food bills.
Brokers are urging borrowers to secure low fixed-rate mortgage deals while they are still on offer. David Hollingworth, from broker L&C, says: “I would expect that the rounds of rate changes we’ve seen could continue over the near term, so if you are within six months of your mortgage deal ending you are well-placed to start reviewing what’s on offer.
If you’re coming to the end of your mortgage deal, or languishing on your lender’s standard variable rate (SVR) you would be wise to start searching for a new deal sooner rather than later.
Ian McKenzie, CEO at The Guild of Property Professionals, said: “People on fixed rate mortgages are currently unaffected, but they should keep an eye out for when their deal is set to end and make preparations in advance. About 1.5m fixed rate mortgages will end this year and next and homeowners need to be ready to swoop on a new deal when the time comes to renew.”
Remortgaging for a better deal
The remortgage process typically takes between four and eight weeks, so it’s usually best to start your search at least three months before your current deal expires to avoid going onto your lender’s expensive standard variable rate. It is possible to lock in a new mortgage deal up to six months before you want it to begin, so this gives you plenty of time to plan ahead and take advantage of today’s competitive rates.
Doing a straightforward ‘product transfer’, by switching to a new deal with your existing lender, is likely to be the quickest and easiest way to secure a better deal – but bear in mind that it is unlikely to be the best deal out there.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.