Simon Taylor’s essential guide for homeowners & buyers wrestling with sudden interest rates hikes
28th September 2022
28th September 2022
They say a lot can happen in a week. We’ve had an interest rate rise, a plunging pound and a new nervousness concerning the direction of interest rates. Inflation and changes to interest rates affect the cost of borrowing, mortgages and all things property.
Anyone with a mortgage deal coming to the end of a fixed term (that includes me) will be faced with a smaller pool of mortgage products and pricier rates.
If you’re coming off a 2 year deal, today’s rates will look ‘alien’ as your mortgage rate was secured when the Bank of England’s base interest rate was slashed to just 0.1%. Those were the days!
No point trying to put a spin on it. This will come as a financial shock to many households. But don’t panic, there is action you can take and people you can seek guidance from on how to prepare for the next couple of months and years.
I’m no mortgage broker but here’s my advice on how to get through a period of higher mortgage rates.
Please take your time, don’t rush and don’t settle.
There will likely be fewer buyers in the market, you’ll have less competition so go for quality, perhaps a property were value can be added and take a longer term view if you can – 5 years plus.
Interest rates are still very low by historical standards and if you have your mortgage offer in place and paperwork all set then you have a strong hand. See as many properties as you can and take any estate agent patter ‘it’ll be gone by Monday’ with a pinch of salt.
Staying as you are on a base rate tracker may be the best option but perhaps you’d be better off on a fixed rate mortgage product. Talk to a mortgage broker — you might also want to consider a longer term deal. Personally, I’ve got my eye on locking in for a 10 year period for certainty and peace of mind.
Some but not all of the mortgage lenders allow you to transfer onto a new product up to 6 months prior to your current deal expiring. Surely worth looking into now as rates could well have ticked up further in 6 months time. And I’m reliably informed that you don’t necessarily require a new mortgage application or affordability checks, when you stay with your existing lender.
You could consider locking in a remortgage product up to 6 months in advance, lining it up for when your current deal expiries. If rates do fall before your new product kicks in (I know, unlikely), then you’d simply cancel and switch to a new, lower rate product.
It’s always worth speaking to a mortgage broker who’ll crunch the numbers to check if it’s worth paying a redemption penalty (if you have one for closing a mortgage deal early) and refinance onto a longer term deal. They’ll likely advise staying as you are and sitting tight but you never know.
Once upon a time, 10 year mortgage deals were rare and exotic.
But if you’re not moving for the foreseeable and like the idea of knowing exactly what your monthly repayment will be for the next 120 months, then a 10 year mortgage
product could be the one for you.
That’s what I’ll be doing but I’ll be choosing a product that allows me to make occasional ‘extra payments’ (if I can) without a hefty early redemption penalty as you just don’t know what life can throw at you.
If so, perhaps it would be wise to make overpayments here and there to ‘chip away’ at the overall size of the mortgage and shorten the term it takes to repay the mortgage in full.
Some but not all lenders allow up to 10% of the size of mortgage to be paid off each year. Here’s an example...
If you overpay a £200,000 mortgage on a 25 year term with an interest rate of 3.5% by £200 each month, you’ll save £26,217 in interest and pay off your home loan 6 years early.
Many move for extra space, seeking that additional bedroom or extra room to work from home in comfort. But if you like where you live, extending / converting a loft is more often than not, cheaper than moving given moving costs like stamp duty.
If you plan on funding works via a remortgage, then you’ll need to factor in the higher interest rates too. Those pesky rates are affecting everything!
With limited availability of rental properties, rental price increases over the last few years has been breathtaking.
This obviously makes it harder for tenants to save against the backdrop of larger and larger deposits being optimal as mortgages become more expensive.
Of course, speak to your broker but now may be the time to pounce on buying if you can afford the monthly repayment and are buying for the long term.
It’s the ‘Wild West’ out there on the mortgage front. Some deals are on the shelf for as little as a couple of hours and some lenders have paused lending altogether.
That’s why I believe a good, switched on mortgage broker is worth their weight in gold. A bit like a good estate agent!
Ultimately with property, not over extending and taking a long term view is essential. A home isn’t a cash machine, a home is a home because you enjoy it and want to live in it.