UK borrowers warned: the days of cheap mortgages are over
As interest rate changes are coming ‘thick and fast’, owners may face big rises in their repayments
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First published on Fri 29 Oct 2021 05.54 EDT
The era of record low mortgage rates looks to be over, borrowers were warned this week, with the government’s independent forecasters predicting costs will rise rapidly over the next two years.
Inflation predictions from the Office for Budget Responsibility, (OBR) released alongside Wednesday’s budget, suggest that the cost of servicing a mortgage could grow by 5.6% next year and 13.1% the year after, as increases in the Bank of England base rate are passed on to borrowers.
According to financial firm AJ Bell, if the predictions are correct, someone who borrowed £250,000 on a two-year fixed-rate mortgage at 2.06% earlier this year could see their annual payments jump by £600 when they go to remortgage in 2023. Someone with £450,000 of borrowing, on the same terms, would see their costs rise by £1,068 a year.
The OBR’s prediction follows several weeks of speculation about how quickly the Bank might act to try to curb rising consumer prices. Tasked with a target of keeping inflation at 2%, it is likely to raise the base rate from 0.1% at some point – with some economists predicting that it could happen as early as next week.
In recent years fixed-rate mortgages have been so cheap that most borrowers have chosen them. Industry data shows that 74% of borrowers are on this kind of deal, and that the 2.2 million with variable rate loans typically owe less.
Some of these borrowers may have been watching the price war in recent months and decided to sit tight, but lenders have started to reprice the very cheapest deals on offer upwards.
This week “price changes have been coming thick and fast”, says David Hollingworth from brokers L&C Mortgages. There are no longer five-year fixed-rate mortgages at below 1%, although on Thursday it was still possible to lock in at just 1.04% with HSBC if you had a 40% deposit. The best-buy two-year rates were still under 1%, with TSB leading the market at 0.84% with a 40% deposit.
But it is not clear how long these will last.
“People have got used to fixed rates continually going down,” says Hollingworth. “This is a sharp reminder that it’s not one-way traffic when it comes to rates. If you are waiting for a cheaper deal then you have probably missed it.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, says most of the price changes have been on deals targeted at those borrowing up to 75% loan-to-value (LTV).
“Lenders, including NatWest, Santander and Nationwide have increased selected rates, further reducing the number of sub-1% options,” he adds.
For those borrowing larger percentages, interest rates are not currently changing, but a rising base rate could lead to adjustments upwards.
For anyone on a variable rate mortgage, an increase in the Bank rate is likely to quickly lead to higher monthly repayments.
“I don’t see any reason why lenders would not pass on the full rise,” says Hollingworth.
He points out that for any loan on, or linked to, the standard variable rate, repayments could even be increased by more, as the cost is at the lender’s discretion.
Anyone on a tracker linked to the base rate is guaranteed to see an increase, but it will only be in line with the Bank’s decision.
If you are on a tracker deal, it’s unlikely you will be able to jump off it without paying an early redemption charge. But if you are paying the SVR you might want to fix. Similarly, if your current fixed-rate is due to finish in the next few months, you might want to lock into a good deal while you can.
Harris says that if you are staying with your current lender, you might be able to apply for one of its current deals up to three months before your old one expires.
The new rate will normally take effect on expiry of the old one, so you will switch straight from one to the other.
But some lenders operate differently, he says. He cites Clydesdale Bank, which will allow you to apply up to 180 days in advance, and choose to move on to the new rate within 90 days of your old one expiring, without incurring any early repayment charge.
If you are a current Clydesdale borrower, it is worth finding out what it can offer.
You can also arrange a switch to a new lender some time in advance of your current deal expiring – most let you book a deal for three months before you want it to start, and some let you book and switch up to six months later.
Hollingworth says once you’ve paid your fee, the deal is yours. However, he cautions that you check what you are signing up for. “If you’re going for a two-year fixed rate, and it ends on a certain date rather than running for two years from the day you complete, you won’t get the benefit if you don’t move on to it for five or six months,” he says.
Some lenders are still vying for remortgage borrowers with low rates and incentives. Harris says TSB’s two-year deal is worth a look – it comes with a free valuation and choice of cashback or free legal work. “If you require a higher LTV, Skipton and Platform are offering good remortgage deals with similar incentives,” he adds.
But bear in mind that the fallout from the pandemic might make it harder than you expect to get accepted for a very cheap mortgage.
Lenders are still being very picky about self-employed borrowers, particularly those who took any kind of government help over the past 18 months.
Harris says some lenders are capping LTVs, or offering smaller loans relative to incomes.
If you have concerns about that, or about the impact of any payment breaks you have taken, it might be worth getting advice from a mortgage broker before you apply, or sticking with your existing lender.
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