The Bank of England has warned that approximately one million households in the UK may see a rise in their monthly payments of £500 or more over the next few years as they exit fixed-rate mortgages.

Since December 2021, when the base rate was 0.1% and a two-year fixed-rate mortgage was available for just 0.89%, interest rates have skyrocketed.

Currently, the average two-year fixed rate is 6.85%, and the base rate is 5.25%. You'll pay about 6.3% for a mortgage contract with a five-year term.

If your fixed rate agreement is about to expire, it’s likely you'll have to pay a higher rate when it does. This is set to have an impact on 700,000 customers in the second half of 2023. At present rates, these households will have to pay, on average, an additional £220 each month, according to the Bank of England. However, there are options available if you find yourself in this position.

 1.  If you think you’ll struggle to make a new deal, speak to your lender

Chancellor Jeremy Hunt has stated that banks must put support measures in place to assist homeowners who face considerable hikes in their monthly payments as a result of the recent spike in mortgage rates.

According to the rules, borrowers can temporarily switch to an interest-only mortgage to lower their monthly payments for a maximum of six months.

The temporary switch will not have the same impact on credit scores as it might have in the past; nonetheless, missing payments or taking a mortgage holiday—a complete break from payments—will appear on the borrower's report.

Additionally, lenders agreed to a one-year hold off before initiating repossession procedures against long-term defaulting debtors.

2. Check when your current fixed-rate mortgage ends

Making sure you are aware of when and how your circumstances will change is the first step to take. To find out exactly how much time you have, check your mortgage deal. You will automatically switch to your lender's standard variable rate if you do nothing.

Make sure you are aware of how much you are now paying each month so you can determine how much extra money you will need to set aside when switching to a new deal. Check the remaining mortgage balance at the conclusion of your current agreement, because you'll need it when you apply for a new one.

 3. You may be able to lock in a new mortgage early

For your new arrangement, you could be able to secure a new rate three to six months in advance of your current rate expiry, depending on the lender you choose. If you secure a new rate and if interest rates rise in the interim this will not affect the rate you have already secured. Conversely, if the interest rate drops, some lenders will allow you to move onto a new deal with them at the lower rate.

Most fixed rate deals have early repayment charges that remain payable until the fixed rate deal ends. However, the adviser should ensure your new deal does not commence until after this date, so that you are not penalised with this fee.

 4. Speak to a financial advisor and explore your options.

When looking for a new mortgage, speaking with a financial advisor can be a good option. You will have access to their knowledge, connections and frequently exclusive offers that won't otherwise be available to you directly.

Brokers can discuss which solutions are most likely to be suitable for you and can personalise their recommendations to your unique situation.

It is also worthwhile to contact your present financial advisor and inquire about the rate you might be able to secure by switching products.

 5. Budget for upcoming rise in mortgage repayments

Calculating the precise increase in your mortgage payments when your new arrangement begins is crucial.

The impact of a higher mortgage rate may not be as significant for households with some financial wiggle room; rather, it may simply mean that less money will be saved or invested each month.

As interest rates are currently at an extreme high, it may not be the best decision to enter a fixed rate mortgage just yet – this would prohibit you from being able to switch onto a better rate in the future if interest rates decrease. However, if you’re on a variable rate mortgage, you may have the opportunity to secure a better rate in the future.

For some mortgage customers, who must manage much tighter budgets, even the tiniest increases in living expenses could cause them to default if they don't figure out how to balance their income and expenses.

As previously stated by the Bank of England, homeowners leaving fixed-rate contracts in 2023 may face an average £500 increase in their repayments. If, for example, you can find places where you could make spending concessions, being ready for this could prevent you from receiving a financial shock.

 6. Overpay your current fixed-rate mortgage if you can afford to

If you have the luxury of a mortgage rate that is significantly lower than the current market average, it's recommended using overpayments to pay off as much of your outstanding balance as you can. Most lenders will allow overpayments of between 10 and 20 percent without incurring penalties. However, different lenders have different guidelines for doing this. This will result in a reduction to your overall outstanding balance when you are considering a new deal.

In this manner, you will have less to repay and a smaller amount on which to pay higher interest rates when you switch to your next arrangement. This would result in you having less to repay and thus reduce your monthly payments when you switch to your next arrangement.

 

For more information or guidance on the end of fixed-rate mortgages, get in touch with one of our advisors.

 

Disclaimer:As a mortgage is secured against your property, it could be repossessed if you do not keep up the mortgage repayments.

 

Disclaimer: Whateley Wealth Management is not responsible for any external site content. 

 

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