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Thousands of borrowers are facing higher mortgage bills
The biggest UK mortgage lenders have continued to reduce interest rates over the past few weeks, as the market prices in recent and further expected cuts to the Bank of England’s Bank Rate, which is currently at 5pc.
While this is good news for homeowners looking to remortgage, many people signing on for a new deal this year are still likely to be facing much higher rates than what they’ve been used to.
More than 1.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2024 – here’s what you should do if you’re one of them.
The average two-year fixed rate is currently 5.47pc; the average five-year fix is priced slightly cheaper at 5.14pc, according to analyst Moneyfacts.
The average two-year tracker is 5.68pc.
It’s possible to get much cheaper deals than this, but the lowest rates are often reserved for those who are remortgaging and seeking to borrow no more than 60pc of the property’s value.
One decision lots of homeowners have been struggling with is whether to commit to a fixed-rate deal, or opt for a tracker mortgage that’s linked to the Bank Rate. Should interest rates reduce further, those with tracker mortgages will see their mortgage bills get cheaper – until then, you might find yourself on a deal that’s more expensive than the cheapest fixed deals.
Our guide on the fixed rate vs tracker dilemma can help.
The Consumer Prices Index (CPI) measure of inflation rose by 2.2pc in August, the same as in July. The rise was not as high as experts had expected, and is largely down to energy prices failing to fall as much as they did at the same time last year, according to the Office for National Statistics.
The figures aren’t expected to affect future Bank Rate reductions.
David Hollingworth, associate director at L&C Mortgages said: “Inflation holding steady at a rate of 2.2pc may sound underwhelming but is likely to be viewed positively. It was in line with forecasts so shouldn’t create any waves in what the market expects, and the Bank of England has already signalled that it expects inflation to rise as the year progresses.
“So, although above the target rate of 2pc, today’s stable figure shouldn’t alter the expectations that we could see another rate cut before long.
“The level of competition between lenders remains intense and they’ve continued to reprice regularly to try and keep up with peers.”
In August, the Bank of England made 0.25 percentage point cut to its central interest rate, known as the Bank Rate after 14 consecutive raises since December 2021, taking it to 5pc after a 12 month stint at 5.25pc. Its next decision is due on September 19.
Lenders’ decisions to change mortgage rates are affected by a number of factors; what is predicted to happen to interest rates, as well as other market factors such as swap rates.
One of the cheapest two-year fixed-rate mortgages available across the UK for someone remortgaging is now 4.14pc, offered by TSB according to Moneyfacts. It is available for those with a 40pc deposit or equity, and has a £1,495 product fee.
Fix for five years, and one of the cheapest rates available is 3.87pc, from HSBC, again for those with 40pc equity. It has a £1,499 product fee.
It is important to remember that the lowest interest rates do not necessarily equate to the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
Lenders commonly set fees between £899 and £1,999, but some use percentages instead, such as 0.5pc of the overall loan amount.
Adrian Anderson, of broker Anderson Harris, said: “Don’t just look at the headline rate. Consider the overall cost of the deal, including any fees and whether the lender will pay for a mortgage valuation and legal conveyance, which most banks do.”
If you are locking in for longer than two years then be sure to check any repayment penalties which would apply should your circumstances change and you need to exit the deal early – these can run into the thousands of pounds.
Our mortgage increase calculator can show how much your bills will change as a result of remortgaging to a new deal.
Thousands of today’s homeowners with fixed mortgages are still on rates agreed when the Bank Rate was far lower than it is today. This means they are likely to face a steep increase in their payments when they reach the end of their current deal and take out a new loan.
This is because while fixed rates may be falling, the cost of borrowing is still inflated when compared with mortgages which were locked in two or five years ago. Borrowers coming off those deals and searching for a new rate are very likely to face higher rates.
Rather than opting for five or 10-year deals, brokers are suggesting a typical borrower should fix for two years as this would minimise the amount of time spent fixed on an inflated rate.
Mortgage rates are predicted to have fallen by 2026, when homeowners will be able to make the most of cheaper repayments. However, the market has proved to be unpredictable, and how long each household fixes will depend on their individual financial circumstances.
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For those needing to remortgage this year, or early in 2025, they might need to prepare for a higher mortgage rate than they had perhaps hoped for.
Nicholas Mendes of broker John Charcol says: “We can anticipate the downward trend in fixed-rate costs to continue into next year, as markets price in further Bank Rate cuts and lenders use every opportunity to stay ahead of the competition by actively passing on reductions in swaps, with this in mind a 3.5pc five-year fixed rate could be within reach by Q1 next year.
“Overall, this rate reduction is a promising sign for the future, bringing much-needed relief and confidence back to the property and mortgage market. Let’s also take a moment to recall Governor Andrew Bailey’s previous comments suggested that the Bank could cut rates faster than markets expect, making a total of three rate cuts this year a possibility.”
Borrowers who put more equity into a property make themselves less risky customers, increasing the chances a lender will be happier to offer them lower interest rates.
Banks use the term “loan-to-value ratio” (LTV) to label how much they lend a borrower against a home. For example, a £160,000 mortgage on a £200,000 home would be a loan-to-value of 80pc.
A lower loan-to-value and bigger deposit will usually unlock lower interest rates. Mr Anderson said: “It can make quite a big difference to the amount of interest you pay over the term of the deal.
“So if you have cash available you may want to consider paying down part of the mortgage to access a better rate.”
Our mortgage overpayment calculator can help you weigh up whether you’re better off overpaying your mortgage, or putting your extra cash into a savings account.
Households with a significant cash pile could also access lower rates by using an offset mortgage. A handful of banks allow borrowers to reduce the cost of their loan using cash held in an account with the same lender.
For example, a customer borrowing a £500,000 mortgage and with £200,000 in savings would only pay interest on £300,000 of the loan, but will forfeit any interest on the cash pot.
Based on a mortgage interest rate of 4.5pc, this would reduce monthly interest from £1,873 a month to £1,124 – a saving of £749 each month.
Mr Anderson said: “Offset mortgages are proving especially popular as tax thresholds are shrinking and reducing households’ personal allowance.
“There should be no tax to pay on savings used to offset the mortgage balance and you should not be paying interest on the mortgage balance offset by the cash funds. The account should also be instant access so you still have access to liquidity if circumstances change.”
Borrowers opting for a more specialist mortgage, such as an offset deal, should consult a mortgage adviser. The market is changing rapidly and with savings rates also on the rise, independent advice could save a lot of money.
Any homeowners struggling to pay their mortgage bills are able to switch to interest-only deals without a formal repayment plan. City watchdog, the Financial Conduct Authority, announced the change last year in a bid to help lenders provide mortgage forbearance at scale.
However, once the temporary interest-free period is over, homeowners must make up their repayments. To switch to a permanent interest-only deal, you’ll still need a credible repayment plan.