- BoE boss Bailey warns that higher inflation could mean a need for a rate hike
- Banks have plenty of cash to lend, but rate expectations can drive up costs
- Homeowners running with fixed rate deals should look at rates now
- How much will a new mortgage cost you? Check With Our Mortgage Finder
Homeowners who are coming to the end of a mortgage deal are being urged to protect their finances by locking in a new fixed rate loan.
A tsunami of higher energy and food bills, as well as inflation heading towards four percent, mean major household bills are rising.
And Bank of England Governor Andrew Bailey has warned that if high inflation continues to raise interest rates, mortgages are likely to become even more expensive. Bailey hasn’t ruled out a rate hike before the end of the year.
David Hollingsworth, a mortgage expert at broker L&C, says the need to raise interest rates to curb inflation means now may be the perfect time to lock in loans that will provide homeowners with payment certainty.
Rise: A tsunami of higher energy and food bills, as well as inflation heading towards four percent, mean major household bills are rising
He adds: ‘At a time when other costs are rising, being able to lock in the cost of typically the largest household outgoing, will help build flexibility in homeowners’ monthly budgets.’
Although banks and building societies have no shortage of funds to lend to borrowers – a result of the amount being recorded in savings accounts – Hollingsworth believes it is only a matter of time before mortgage prices rise. a matter of.
“The higher the rate hike that markets expect, the more likely it is to add to higher financing costs for lenders,” he says.
‘Lenders are competing hard to differentiate rates, so profit margins have been cut to the bone.’
For most homeowners coming to the end of the current deal, a fixed rate loan is the best option. As Hollingsworth says, it offers payment certainty as well as protection from rising interest rates that a standard variable rate, discounted rate or a tracker does not.
Nicolas Mendes, an advisor to mortgage broker John Charcoal, says borrowers who have less than six months remaining on their current loan deal should now act to secure a new one.
“You can negotiate a new deal with most lenders six months in advance,” he says. “If in the meantime the rates on fixed rate loans come down further, you can switch to a lower rate with the lender before the start of the new deal. It’s a victory.’
Should you fixate for two or five years?
For most borrowers, the main issue is how long to fix it.
A fixed rate loan of two years gives a borrower more flexibility than a longer term fix. This means they can build equity in their home — perhaps helped by the mortgage overpayment — so that at the end of the deal, they’re in a better position to secure a keyer rate. The lower the size of the loan relative to the value of the home, the better the rate the lender will offer.
Which mortgage can you apply for?
This is Money’s mortgage tool powered by L&C that lets you see the rates you might be able to get based on the value of your home and the size of your existing mortgage.
This will show you how much you will pay each month on the best deals you can apply for.
Check Mortgage Rates Here
Two-year fixed-rate deals for borrowers with loans representing less than 60 per cent of their home value are available from the platform – part of Co-operative Bank – subject to an arrangement fee of 0.79 per cent, £1,499. The Santander has a slightly higher equivalent rate of 0.84 percent, but the fee is much lower at £749.
There are 20 years left for the repayment loan of £170,000, resulting in a monthly mortgage payment of £770.
Still, brokers say that most homeowners are opting for a five-year fixed rate loan. ‘They offer long-term payment stability,’ says Mendes.
This advantage comes at a small cost, however, as the best five-year loans are more expensive than their shorter counterparts. For example, the best five-year fix for someone with a minimum of 40 percent equity in their home is 0.94 percent.
Although some borrowers will be put off by hefty early repayment fees on existing loans, they can take action to reduce the size of their mortgage loan. Most lenders will now allow fee-free annual overpayments of up to 10 percent of the loan value.
Hollingsworth says that overpayments only make sense if a homeowner doesn’t have other more expensive debt that they must pay off first — for example, an outstanding credit card balance.
Ten-Year Fixes Less Than 2% – But See Exit Fees
Many lenders now offer borrowers the opportunity to set their own mortgage rate for the next ten years.
This type of loan appeals the most among homeowners who have no plans to relocate the house in the near future.
This is because if a homeowner is required to break the deal, an early repayment fee will be levied—perhaps because they want to move the house.
David Hollingsworth at mortgage broker L&C warns, ‘Such early repayment charges can often run up to thousands of pounds, so only take a ten-year fix if it aligns with your needs and future plans.’
Virgin Money offers the best ten-year fixed-rate loan at 1.95 percent for a home with a minimum equity of 35 percent.
On a repayment loan of £170,000 over 20 years, this would cost £856 per month. But early repayment charges apply full time, starting at eight percent (of the loan) in the initial years – and then dropping to one percent. Therefore, an individual would face a fee of £13,600 for redeeming in a year.
TSB’s approach is more flexible for ten-year fixed-rate loans. On loans up to 60 percent, its mortgage rate is…