More than 1.6m homeowners are facing a mortgage timebomb when their fixed rate deals come to an end this year.
Many of these people are currently on fixed rate deals at around 2% or even lower, but following a series of increases in the Bank of England base rate over the past couple of years, most fixed rates are now well in excess of 4.5%. This means vast numbers of homeowners will see their monthly payments jump in 2024, sometimes by hundreds of pounds, when they come to remortgage.
Alastair Douglas, CEO of TotallyMoney, the credit experts, said: “For 13 years, the Bank of England kept the base rate locked below 1%, and the thought of it suddenly ramping up to 5.25% was almost unimaginable. People became used to cheap money — and rock bottom rates helped drive up property prices.
“Two years ago, the average two-year fixed rate deal was just shy of 2%, and anybody now rolling off an old deal is likely to be in for a shock when their mortgage payments suddenly skyrocket. Now the average two-year fixed-rate is more than 5.50% and standard variable rates are as high as 9.49%.”
Here, we explain what to do if your fixed rate mortgage is finishing soon, and how you can prepare for higher rates.
What higher rates mean for you
Last summer, only one in three mortgage holders faced a rise in their monthly costs, According to the latest Hargreaves Lansdown Savings and Resilience Barometer. By the summer of 2024 this will rise to three in five.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Those who need to remortgage while rates are higher are set for mortgage misery. When a household spends 25% of its after-tax income on the mortgage, it’s considered to be at risk of falling behind on payments. Last summer, 23% of people were spending this proportion or more – and by this summer that will rise to 26%.”
To give you some idea of how steep a jump in payments you might see when your current fixed rate deal ends, we’ve crunched the numbers on your behalf.
For example, someone with a £150,000 mortgage with 15 years left to run, who is currently on a fixed rate of 1.75%, would be paying £948 a month, assuming their mortgage is on a repayment basis.
When this deal ends, if they want to remortgage to a two-year fixed rate deal, the best available rates at the time of writing were around 4.59%. The same £150,000 mortgage over a 15 year term would cost £1,154 a month, an monthly increase of £206, or £2,472 over the year.
The bigger the mortgage, the bigger the payment shock those whose deals are coming to an end will face. If, for example, you have a £300,000 mortgage, again with 15 years left to run, monthly payments would cost you £1,896 if you were on a fixed rate of 1.75%.
If you were to remortgage onto a two-year fixed rate at 4.59%, your monthly payments would jump to £2,309, which is £413 a month higher than your previous monthly payments, or £4,956 over a year.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
What you can do to manage higher payments
Knowing your monthly mortgage payments are likely to jump sharply when your current deal ends can be really worrying. However, there are various steps you can take to help make the rise in costs more manageable.
For example, you may want to think about temporarily extending the term of your mortgage to make payments more affordable. Increasing the term from, for example, 10 to 15 years, will spread the amount remaining on your mortgage over a longer period, and reduce your monthly repayments. However, the downside is that you’ll pay more interest over the repayment period, so ideally you should reduce your term again once you can afford to do so.
Alternatively, If you have a repayment mortgage, you might want to think about changing part of it to an interest-only mortgage to keep your payments down. Remember, however, that you’ll need a plan for how you’ll repay the original sum borrowed at the end of the term. Read our article How do I pay off my interest-only mortgage? to find out more about this. You may also consider taking out a retirement interest-only (RIO) mortgage, where you only pay the interest on the amount borrowed indefinitely, with the loan paid back only when the property is sold and you die or move out. You can learn more about retirement interest-only mortgages in our guide How retirement interest-only mortgages work.
If you are struggling with higher payments, please don’t suffer in silence and speak to your lender as soon as possible. They might be able to look at ways to make things more manageable for you. Read more in our article What can you do if you can’t pay your mortgage?
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