Move fast and protect your home against soaring loan rates
Homeowners whose mortgage agreements are about to expire have faced another worrying week. The costs of new home loans continue to rise, reaching levels not seen since the 2008 financial crisis.
The Bank of England is now announcing that by next year nearly a million households will be unable to repay their mortgages due to rising rates. There are also fears of an imminent correction in real estate prices.
With the cost of living skyrocketing and financial markets in turmoil, this added burden on households couldn’t come at a more troubling time. But there are steps homeowners can take to protect their finances.
Our home: there are steps homeowners can take to protect their finances
How much more will I pay for a new mortgage?
Just a year ago, a two-year fixed-rate mortgage cost an average of 2.25% – 2.55% for a five-year contract. Today, the comparable rates are 6.43 and 6.29%.
On a standard £200,000 mortgage, a 2.25% loan costs £872 per month. At 6.43%, the monthly cost is £1,341.
Worryingly, more than two million households have fixed rate agreements that expire next year and are likely to see their payments increase.
My current mortgage contract is ending soon – what should I do?
If your agreement ends, you need to act quickly to put a new one in place. Make sure you have all the required documents ready such as payslips and bank statements.
Lenders are extremely busy – it takes over four weeks to get a new mortgage offer. If you stick with your current lender and don’t increase your borrowing, the process will be faster because it avoids having to make new affordability calculations.
Once you’ve applied, most high street lenders will honor the first rate offered. Specialty lenders might not be as flexible.
What happens if I have 6 or 12 months left on my loan contract?
Most mortgage offers last six months, so even if you’re far from having to remortgage, it’s worth starting the process. You can enter into a transaction in advance to protect yourself against further rate increases. If the rates go down, you can reapply.
Make sure there are no upfront non-refundable fees and give yourself plenty of time to apply for a new offer.
What if I’m moving?
Mortgages are usually portable, so you can take out a loan for a new property and avoid prepayment charges. If you’re expanding your workforce and want to borrow more, you may be able to do so with your current lender, but it’s likely to be at a higher rate.
Can I switch to an interest-only offer to reduce my repayments?
Interest-only mortgages allow you to pay only the interest, not eat into the principal. Therefore, the payments are lower. But a lender will want you to have significant equity in your home. They will also want to know how you plan to pay off the mortgage at the end of its term.
Another way to reduce monthly payments is with a longer term loan – for example, 30 years instead of 25.
But borrowing for a longer period means you pay more interest over the life of the loan.
Can I request a mortgage payment holiday?
This should be a last resort. This will only increase the amount of interest you pay in the long run.
If you have a new job that won’t start for a few months, having a payment holiday can be helpful if you’re struggling to keep up with ongoing loan payments. If your finances are going to be strained, it’s best to speak to your lender as soon as possible.
Will I get a cheaper deal if I have more equity in my home?
Mortgages tend to be cheaper the more equity you have. For example, a five-year 90% fixed rate mortgage with Virgin is currently priced at 5.48%. But HSBC offers a five-year solution at 5.24% for loans at values up to 75%.
Do I have to cancel my current offer, pay a penalty and accept a new one before rates increase further?
Some landlords are forgoing their low rate offers to lock in to higher offers now, in the hope that rates will rise further. It is very difficult to determine if this will save money in the long term because there is so much uncertainty about the future of interest rates.
If you plan to switch sooner, be sure to check whether you will be liable for the prepayment fee. You must take this into account in your calculations.
Alternatively, you can stay on your existing agreement and overpay – again being careful of prepayment charges. This would reduce the total amount of interest payable and get you used to paying a higher monthly sum.
You can also consider saving in a high-yield savings account and using that money to pay off part of your mortgage later.
What about rental mortgages?
Rental mortgage interest rates increase alongside standard loans. That means landlords will likely have to raise rents for tenants – or take a financial hit themselves. Some owners may well find themselves forced to sell some of their property.
We survived much higher rates in the 1980s – so what’s the problem?
Interest rates in the late 1980s reached almost 15%, placing a huge financial burden on home loan holders. Today, homeowners have bigger debts to pay off because real estate has become more expensive.
Plus, interest rates have been low for many years, which means the sudden rise comes as a surprise to many homeowners.
Should I wait for the Chancellor’s budget statement at the end of this month?
Some financial experts hope that when the Chancellor issues his statement, the current volatility in financial markets may ease. However, there can be no assurance that this will be the case or that it will result in lower borrowing costs.
There are adjustable rate mortgages for borrowers who think interest rates won’t go up as much as expected.
But if they are wrong and mortgage rates go up again, they will face higher monthly repayments. A risky move.
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