Tips for securing a new deal and what to do if you cannot afford your monthly payments
More people are being priced out of mortgage deals as lenders respond to fears about further interest rate rises by launching even more expensive products on to the market.
Mortgage providers have revised their loan offers repeatedly in recent weeks “in a scramble to keep up with soaring funding costs”, explained Reuters.
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This is because lenders expect more interest rate rises from the Bank of England “as it battles stubbornly high inflation”.
The Bank increased interest rates to a 15-year high of 5% on 22 June. The average two-year fixed rate hit 6.3% as of the end of June, according to Moneyfacts, which warned five-year fixes will soon “breach the 6% threshold”.
Mortgages could get even more expensive if rates continue to rise, with some economists such as Schroders increasing their expectations of where rates could peak from 5% to 6.5% by the end of the year.
It means more bad news for homeowners already struggling with higher mortgage payments amid the cost of living crisis.
How bad will it get?
The Resolution Foundation has warned that borrowers remortgaging next year will have to pay on average £3,000 more over the course of the year.
Meanwhile, research from Citizens Advice found that more than a quarter of current mortgage holders would not be able to afford their monthly repayments if they increased by £100 a month. Nearly half would be unable to make their payments if they rose by £250 a month.
“The stark findings highlight the risk around rising mortgage rates,” said This Is Money. “Experts are warning of a looming mortgage crisis as borrowers who fixed their rates two or more years ago will have locked in much cheaper deals and will see their outgoings soar.”
British households are “among the most vulnerable in the world” to rising interest rates and higher government bond yields, according to The Times. This is because “more than 90% of borrowers are on relatively short fixed-term deals of between two and five years”.
There are around 800,000 fixed-rate deals ending in the second half of 2023, according to banking trade body UK Finance. Around 1.6 million are due to end in 2024.
MoneySavingExpert founder Martin Lewis has warned of a “mortgage ticking time bomb” for many of these people as rates rise. Homeowners will come off currently lower-price fixed-rate deals and will be hit by an “enormous bill shock”, he warned.
How can you secure the best remortgage deal?
“Remortgaging requires effort on your part – even more so since the cost-of-living crisis began,” said Kit Sproson on MoneySavingExpert. “But being proactive could generate a lot of savings in the long run.”
Start the remortgage process between three and six months before your fixed rate expires, he advised, to avoid automatically reverting to your lender’s standard variable rate (SVR), which is immediately subject to Bank of England rate rises.
The first, important step is to “polish your credit report and learn how else to bolster your mortgage credentials”. Then start looking for the best available rate, based on the maximum amount that you can borrow. This is based on a multiple of your salary and monthly outgoings, your property’s up-to-date value and your loan-to-value ratio.
If you’re rejected after applying, “don’t automatically apply again with a different lender”, Sproson continued. “Too many applications will mess up your credit score.” Instead, have another look at your credit report, to see if there is anything you might have missed. If your report is “still looking good”, the lender “may have had its own reason for turning you down”, so “it’s worth asking” in order to identify other stumbling blocks.
MoneySavingExpert’s Lewis has issued a comprehensive 62-page guide with further tips on remortgaging that he says could help homeowners to save hundreds of pounds a month.
“Remember, it’s not about the best deal out there – it’s about the best deal for you,” Lewis said.
What if you can’t afford your mortgage payments?
Chancellor Jeremy Hunt has secured pledges from mortgage lenders to be more flexible with struggling borrowers in the current economic climate.
Most banks and building societies have signed up to a mortgage charter, agreeing that there will be a “minimum 12 month period before there’s a repossession without consent”.
Struggling borrowers will also be able to extend the term of their mortgage or switch to an interest-only agreement and move back to the original deal within six months with “no questions asked and no impact on your credit score”.
Jim Akin of credit bureau Experian stressed the need to “take action quickly to minimise potential fees, penalties and damage to your credit”.
The first step is reaching out to your lender. They may agree to loan forbearance – reducing or suspending mortgage payments for an agreed period, usually up to 12 months.
For borrowers with a good credit rating, another option is refinancing – taking out a new mortgage with a lower monthly payment that will make your house payments more affordable. However, this process “can take weeks or even months, and you will likely have to pay (or finance) origination fees associated with the new loan”, Akin warned.
If after exploring these options you are still unable to afford your repayments, renting out or selling your home may help to “contain the damage” and leave you “in the best position to start over”, Akin concluded.
Citizens Advice also has tips on what to do if you cannot afford your mortgage repayments, and recommends “getting independent financial advice” before making any mortgage decisions.
