Would-be and existing homeowners, looking for some sense of certainty in the mortgage market, have been left bitterly disappointed.
Last week’s UK inflation figures, which showed a slower-than-expected decrease, have sparked expectations that the Bank of England will raise interest rates above 5% by the end of the year – meaning that those borrowing to buy, or renewing their mortgage, soon will face significant cost increases.
Households looking for a new deal have been warned to expect mostly 5%-plus fixed-rate deals in the coming weeks. Nationwide, one of the UK’s biggest lenders, said it was increasing some fixed and tracker rates by up to 0.45 percentage points from last Friday.
Sarah Coles at the investment platform Hargreaves Lansdown says rates will be pushed up in the short term – even if the financial markets calm. “For those waiting and hoping for fixed rates to fall, there could be a lot more waiting and a lot less hope,” she says.
“Concerns about the stickiness of inflation are likely to mean we won’t get Bank of England rate cuts this side of the new year. Anyone waiting it out on a variable rate, meanwhile, will be paying a higher price for longer.”
Here is what the changes mean for homeowners, both current and hopeful, and what you can do.
The first-time buyer
Those trying to get on to the property ladder already face a number of hurdles, of course: getting the deposit together, getting approval and finding the right property.
A spike in rates will add even more to their difficulties. It may even prompt consideration as to whether to press ahead, says David Hollingworth at broker L&C Mortgages. “I think it will give them pause for thought to consider ‘is now the right time?’,” he says.
Coles says that first-time buyers could opt for a variable rate deal in the hope that rates will come back down in the near future.
“However, you don’t know how long you’ll need to wait,” she says. The same applies to trying to stall a purchase in the hope that things may get better.
Being on a variable rate
While the majority of homeowners are on fixed-rate deals, some 1.5 million have a variable rate, with repayments generally moving up and down in line with the Bank of England base rate.
Many of these people are sitting on their lender’s standard variable rate (SVR). Some could have a short amount of time left on their loan, or have come off a fixed-rate deal.
SVR rates typically start at about two percentage points above the base rate. The recent rises in that rate have brought them to levels last seen about 16 years ago, says Hollingworth.
SVRs lead to unpredictability in payments, says Nicholas Mendes at broker firm John Charcol, and they vary considerably between lenders.
“Major lenders’ SVRs are between 6.99% and 7.74%, but several building societies have between 6% and 7%. At the extremes, Newcastle building society’s is only 5.19%, whereas Virgin Money’s is 8.24%,” he says.
Mark Harris, at broker SPF Private Clients, says those waiting for fixed-rate deals to come down before switching could go for a base-rate tracker with no early repayment charges (ERCs) in the meantime. “This will bring monthly payments down and give you the flexibility to switch to a fixed rate when the price of those, hopefully, falls.
“For example, Barclays has an ERC-free two-year tracker with a pay rate of 4.65%, which is considerably better than its SVR of 7.99%.”
If a deal is coming to an end
For those approaching the end of a fixed-rate deal, the events of last week have been “horrible timing,” says Coles. There are no good options, she says, given the choice of a higher fixed rate or a high variable rate in the hope that the fixes come down. “It’s just a case of finding the one that’s the least worst,” she says.
For those with some time to play with, there is some possible light at the end of the tunnel. “You can apply six months in advance of when your fixed rate is due to expire. In the event that rates go up, you have already secured a deal in advance, and if rates go down, you can always amend the application with the existing lender, or submit an application with a new lender, meaning you get the best deal,” says Mendes.
And those with a few years left
Homeowners with a few years left on a fixed-rate deal are in a good situation, but will be paying attention to shifts in the market in the hope that calm is restored before they have to renew.
The fact that longer-term fixed rates are priced better than shorter-term ones at present shows the market expects interest rates to ease back once inflation comes under control, says Hollingworth.
And now is the time to prepare for increased repayments, he says.
“Make the most of the fact that you have got a good fix at the moment, either by squirrelling more money away so you can reduce the mortgage once the deal comes to an end or – particularly as savings rates have gone up – you might actually be able to earn more on a savings rate than you would be paying off the mortgage.”
Most lenders will allow borrowers to overpay by up to 10% of the outstanding loan amount every year without penalty, says Mendes.
Overpaying could also mean that the loan-to-value ratio comes down on your property, meaning you could get a better deal when you do come to remortgage.
