Mortgage holders coming to the end of their fixed interest rates will soon navigate higher rates with fewer loans on offer than when they were last in the market, particularly if they took on their mortgage between March 2020 and December 2021, when the Bank of England base rate was at an all-time low of 0.1 percent.
This will come as a shock to many owners. But don’t panic, there are things you can do and people you can talk to to help you prepare for the coming months and years.
Here are my tips for beating the mortgage time bomb, whatever your situation.
If you are a first time buyer
We must not forget that we are still in a low interest rate environment, historically speaking. Most people buying their first home today will not remember the interest rates of the late 1980s, when the Bank’s base rate was 14.875%.
But don’t throw caution to the wind. In a real estate market like this where there’s not a lot of supply, if you have a mortgage that’s been agreed in principle, done all your paperwork and you’re visiting with 25 other buyers, it’s understandable that you be tempted to go out and buy all you can. Now is not the time to do so.
A good apartment will always be a good apartment, a rotten apartment will be a rotten apartment in any market. There are some rotten apartments that are selling really fast right now, but these are the ones you don’t want to be stuck with in uncertain times.
If, on the other hand, you’re buying for the long haul and picking something you can add value to, and can get a decent mortgage before interest rates go up, then go for it. .
If you are on a variable rate
Get a fix now. Talk to a mortgage broker – you may want to consider fixing for as long as you can.
If you have six months left at a fixed rate
Check what your current lender will offer you and how it compares to others. Some lenders have extended their product transfer periods from three to six months. This is when you stay with your current lender and transition from your old contract to a new one. You don’t need to re-apply for a mortgage or check affordability, you just choose the deal you want to switch to.
You can also consider remortgaging and entering into a deal six months in advance, getting a new rate and changing when your deal ends to avoid prepayment charges. If rates drop before your start date, you can exit and upgrade to a better deal. If fares go up (which is more likely), you’ve already gotten the best possible fare.
If you have two to three years left on a fixed rate
Talk to a mortgage broker who will calculate whether it’s worth paying the buyout penalty to get out early and agree a five- or ten-year fixed rate mortgage instead.
If you want longer term certainty
It’s certainly worth considering 10-year fixed rate loans, especially if you don’t plan to move again during that time. Reasons why most people don’t tend to repair for so long include the desire for more flexibility, the scarcity of such offers, and the higher fees charged for longer repairs.
Lenders are in business to make money on what they lend, so the fees charged over a 10 year term are usually higher and there are always prepayment charges as well. Ask a mortgage professional which mortgage rate and term is best for you.
If you have money to overpay your mortgage
Reducing the overall balance you owe — and paying interest — is always a good idea if you can manage it, especially before your lender’s interest rates go up again. An online calculator will tell you how much you can reduce the term of your mortgage if you pay a lump sum now.
Alternatively, you are generally allowed to overpay the equivalent of 10% of your remaining mortgage debt each year, which would lower your monthly repayments and shorten the term.
For example, if you have an outstanding mortgage debt of £200,000 and a term of 25 years at an interest rate of 3.5%, overpaying your mortgage by £200 per month would save you £26,217 in interest only and would mean that you would pay off the debt five years and 11 months earlier.
If you would rather renovate than move
People often move because they lack space in their current home, but if you like the area you live in and can’t afford to expand it, would it be cheaper to expand at the square ?
Due to inflation, the war in Ukraine and shortages in the labor market, construction work is taking longer and costing more, so you will need to budget carefully and weigh the cost of the work against the moving cost including stamp duty, transfer fee and so on.
If you plan to remortgage to finance construction work, you will also have to take into account the increase in interest rates in this case.
If you are considering renting until you find the right home to buy
Rents are rising and will continue to do so. A large number of rental investors are selling, which means there are fewer rental units to choose from, driving up rents.
It will also make it harder for tenants to save the increasingly large deposits they will need as mortgage financing becomes more expensive and more limited.
If you are in a position to buy now and are buying for the long term, do so.
If you think you can find the best mortgage without professional help
There are offers, but you have to be very smart and incredibly organized to spot them yourself. Sometimes a mortgage may be available for only a few hours if a lender has more money than they have lent out over a certain period of time, for example. That’s why it’s worth finding a good mortgage advisor to help you find the best deal.
Some charge the borrower a fee, but many receive a commission from the lender, so offer advice for free. It’s up to you to decide what you feel most comfortable with. In the past, people feared that no-fee brokers wouldn’t have access to the same offers as paid brokers, but that’s usually not the case now.
At the end of the day, it’s important to remember that while knowing that house prices are falling or growth is slowing isn’t a nice feeling, unless you’re moving, these are just numbers. Your house is your house, buy it because you want to live there.
Head to the Move iQ real estate advice platform for helpful resources to save time, money and hassle when moving (moveiq.co.uk).