Mortgage repayments will triple for more than 800,000 households this year, according to official figures. As borrowers grapple with the cost-of-living crisis, the Office for National Statistics (ONS) reported that 1.4million households are set to renew their mortgages this year – with rates far higher, adding hundreds of pounds to average monthly bills.
The average remortgager will pay £250 a month more on their new fixed rate deal, it said. Yet for many this will be much more. Some 57% of borrowers have been paying back their mortgage in the past five years at a fixed interest rate of 2%, but the ONS said for 800,000 homeowners they will need to repay at a rate of 5% this year, resulting in many being pushed into serious hardship.
More worrying figures came from the Financial Conduct Authority (FCA) this month in a letter to the House of Commons Treasury select committee from the FCA chief executive Nikhil Rathi. The City watchdog warned that more than 750,000 households are at risk of defaulting on their mortgages over the next two years as escalating borrowing costs make repayments unsustainable.
The FCA estimated 200,000 households had fallen behind on their home loans by last June, accounting for 2.4% of all regulated residential mortgages. With mortgage rates due to rise for many in 2023, it’s more important than ever to find the best value mortgage available to you.
Choosing your next mortgage
Finding the best deal is not just about the cheapest headline rate. First you need to work out whether you would be better off with a fixed rate or a variable rate. If you’re keen to have certainty on your monthly repayments first look at how long you might fix for.
The cheapest rates are typically for two years. While most borrowers have opted for two-year and five-year fixes over the past decade, anyone who thinks they are unlikely to move any time soon could save in the longer term with a 10-year fixed rate.
Think about your circumstances, and then crunch the numbers. It’s also important to factor in the cost of arrangement fees with a new mortgage, which can run into thousands.
Those willing to gamble on what interest rates might do from here might pick a variable rate. Even with the base rate set to rise again next month – and could keep increasing – you could still be better off than with an expensive fixed rate. Plus, variable deals also typically have no early repayment charge, so if fixed rates fell, you could swap and fix your payments without a large fee.
An alternative is to allow your deal to expire and revert to your lender’s standard variable rate (SVR) and wait for fixed rates to fall to a more affordable level. The consensus is that mortgage rates will gradually decline throughout the year, even if interest rates go up.
The average SVR is currently around 6.64%.
However, rates are forecast to keep rising in the short term, so those SVRs will get more expensive. If you pay a high rate for too long, you could wipe out any savings from fixed mortgages rates dropping.
Getting help
A good starting point is to speak to your existing lender about what they can offer you once your deal ends. However, it could be a valuable exercise to enlist the help of an independent mortgage broker who will look for the best home loan for you across the market. They can give you access to far more products than if you went direct to a lender. They also have access to exclusive deals not available to borrowers who don’t have a broker.
Plus they can be a huge help for anyone remortgaging who deviates from what might be considered “the norm”. That includes those who are self-employed and might have irregular (and not guaranteed) earnings, women on maternity leave who are taking a temporary drop in income, those with a young family with high childcare costs. Older borrowers might also face difficulty if their lender won’t lend to those beyond a certain age.
A broker can help with this too, by approaching lenders they know to be flexible or helpful for such circumstances. Some brokers don’t charge a penny for their services. Fee-free brokers will get paid commission from the lender when you take out the mortgage, and you pay nothing for their service.
Already struggling with repayments?
Don’t bury your head in the sand and instead get in touch with your lender. Lenders have a duty to act fairly with customers who are having difficulties. Having a frank conversation with your lender can help them find a way for you to avoid the problem spiralling out of control. Lenders might be able to put you on a payment plan based on what you can afford to pay back. This could mean providing options to extend your mortgage term, for example.
Before picking up the phone to your lender, take some time to work out exactly how much you can afford to pay back each month, which could help with your discussions.
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