Brace for a Mortgage Rate Surge: What Homeowners Need to Know

An estimated 350,000 UK households that secured ultra-low five-year mortgage deals in the winter of 2020 are facing the prospect of significant financial strain as they prepare to renew. With rising costs, homeowners need to act swiftly to mitigate the impending impact on their monthly budgets.

Why Are Many Homeowners Facing Mortgage Rate Increases?

The sharp increase in mortgage approvals was significantly influenced by the stamp duty holiday initiated by former Prime Minister Rishi Sunak in July 2020, which continued until June 2021. This measure aimed to support buyers grappling with the financial consequences of COVID-19 while revitalizing a property market stifled by lockdowns.

Pent-up demand following the first lockdown, along with the so-called “race for space” as families looked to upsize their homes, further fueled this surge in mortgage applications toward the end of 2020.

What Do the New Mortgage Rates Look Like?

According to an analysis by Nous.co, around 350,000 households took out five-year fixed mortgages between October and December 2020, locking in an average interest rate of 1.88%. Nearly half (48%) of all mortgage applicants during this timeframe opted for these five-year fixes, mistakenly believing it was their best option.

As these deals approach their conclusion, homeowners will be confronted with remortgaging at average rates ballooning to approximately 5%. For example, a household with a typical £200,000 mortgage could see their monthly payments surge by £333, equating to an annual increase of £3,997.

In higher-priced regions like London and the South East, the situation is even more dire. A household that purchased an average-priced London property at £566,000, with a 20% deposit, could find themselves £9,050 worse off each year.

The Implications of Rising Costs

As reported, the Treasury is contemplating potential changes to stamp duty and council tax, including a new tax on property sales. According to Greg Marsh, CEO of Nous.co, “Hundreds of thousands of homeowners are in for an unpleasant shock this winter. The era of ultra-cheap mortgages is over, and for these households, thousands of pounds a year will be lost.”

Marsh advised that the stressful remortgaging process has become even more complicated due to these financial changes, urging homeowners to seek professional guidance to secure the best possible mortgage deal.

Tips for Homeowners Facing Renewal

Phillipa Jackson, Operations Director at Purplebricks Mortgages, has shared some essential strategies for homeowners navigating this challenging landscape:

1. Act Now: If you’re approaching renewal, don’t delay. Start comparing rates immediately to lock in a deal before your current agreement expires. Many lenders allow you to secure a rate up to six months in advance.

2. Consult a Mortgage Broker: Engaging with a reputable broker can open doors to deals you may not find elsewhere. A skilled broker will not only assist you in obtaining a mortgage but will also keep an eye on market fluctuations after securing a deal.

3. Assess Your Current Lender’s Offers: Check if your existing mortgage provider has any incentives, such as reduced fees or more favorable terms, to encourage you to stay.

4. Budget Wisely: Anticipate and calculate what your new payment will look like. Review your household expenditures — could savings be found in areas like energy, insurance, or subscriptions?

5. Consider Overpaying Your Current Mortgage: If you can afford to do so, making overpayments while still on your lower rate can help reduce the remaining balance, easing the impact of higher payments later.

6. Explore Shorter-Term Fixes or Tracker Deals: While these options can be less predictable, they may provide necessary flexibility if interest rates continue to decline in the near future.

7. Investigate Support Options: Some lenders may offer schemes for temporary interest-only switches or extended terms in times of financial hardship.

8. Communication Is Crucial: Should you have concerns about an imminent rate increase, reach out to your lender now to discuss options before facing any payment difficulties.

Conclusion: Preparing for Change in a Challenging Market

Despite recent declines in mortgage rates following the instability caused by Liz Truss’s mini-budget, borrowing costs remain significantly higher than pre-cost of living crisis levels. The Bank of England base rate has jumped to 4%, having been at or below 1% from February 2009 until July 2022.

Navigating these turbulent waters requires homeowners to be proactive. By understanding the changing landscape and seeking guidance, homeowners can position themselves to make informed financial decisions as they face the renewal of their mortgages.