It’s been five years since COVID-19 scared the world, and the economic standstill that was lockdown scared economists.
According to most measures, the economy has recovered from the worst effects, and certainly the housing market is in good health.
Some of this resilience is due to the historically low interest rate of the intervening years.
But is there now a price to be paid for the cheap mortgages we enjoyed?
The ticking timebomb
Almost half of mortgages taken out between October 2020 – as the housing market revived after an initial Covid shock – and February 2023 were five-year fixed-rate deals.
With loans based on the lowest Bank Rates ever set by the Bank of England (0.10%, on 19 March 2020 during the early stages of the pandemic) it made sense for borrowers to lock into low rates for as long as possible.
More than 350,000 households who locked into these low-interest fixed-rate mortgages five years ago are expected to see their costs jump as they reach the end of their deals.
Those on typical £200,000 mortgages taken out between October 2020 and February 2023 may see costs increase by £3,996 a year this winter. Those with larger loans face bigger jumps: on a £500,000 home loan, the new rate would mean paying an extra £833 a month.
It could have been worse. The length of the deals meant that those borrowers with 5 years fixed periods avoided the worst hikes when mortgage rates peaked around two years ago, but they still face a payment shock now as they shop around for a new deal.
Don’t expect more falls
There was hope that rates would continue to fall, but this may be looking less likely. The return of inflation, which higher rates are intended to combat means that the Bank of England may want to keep a tighter hold on the money supply. While there had been forecasts of a November cut, the Bank is now not expected to reduce rates until next spring at the earliest.
The Bank of England cut the base rate to 4% in August, but economic data has been released since that makes further cuts look less certain.
Some of the major lenders have actually increased their rates. Their prices reflect the long-term outlook rather than current money markets, and if interest rates are going to be higher for longer, they will need to cover themselves for the future.
You may not be able to expect more five-year fixed mortgage bargains.
So, what can you do if your mortgage payments are set to explode?
If you are among the thousands to be hit by the mortgage timebomb, it may be time to take shelter with a remortgage.
Remortgaging simply means taking out a new mortgage from another lender and paying off the mortgage you already have. Arranging a new mortgage may seem difficult, but it could be more beneficial than remaining with your existing lender. There are several reasons for this. Your current lender will probably put you on their standard variable rate, which will be the highest they offer, while your new lender may be happy to offer you a much more attractive introductory rate.
The savings might not end there. If you’ve been making mortgage payments for the past five years, it’s likely that your outstanding balance has decreased. At the same time, your property’s value may have gone up. These factors together could mean that your new borrowing represents a smaller proportion of your home’s value. This is known as a lower Loan to Value (LTV), and a lower LTV can often help you access more competitive mortgage rates.
Get some help defusing your mortgage timebomb
Of course, if you are facing a ticking timebomb, you need an expert on your side. Because we are independent financial advisors, at Continuum we can search the entire lending market to find the most appropriate deal for you, and help you make your application as simple as possible.
Don’t wait for an expensive explosion. Call us today.
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The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product and you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
