Wednesday, September 5, 2018
Business

The mortgage dilemma

Regardless of whether the Bank of England announces a base rate increase tomorrow, theres no question that the decade-long era of rock-bottom interest rates is now coming to a close.

While the increase will be gradual, the worry is that it could creep up sooner than borrowers expect, making matters increasingly uncomfortable for millions of homeowners.

In November, the Bank of England (BoE) nudged the base rate up to 0.5 per cent from the record low of 0.25 per cent. For a while, analysts were expecting another rate rise this month, until meagre GDP data dampened expectations.

Read more: The City reacts to GDP growth: "All but ended hopes for May rate rise"

And yet, despite the uncertainty over the BoE decision, we have seen a string of rate increases from major lenders in recent weeks, with the likes of Barclays, NatWest, Lloyds, Halifax and TSB all changing their rates on some of their products (or, in Barclays case, as many as 60 products).

This shift is already being felt among homeowners, with the average mortgage rate increasing 0.25 per cent since mid-March, hitting an annual rate of 3.65 per cent, according to comparison and switching service uSwitch. The rise equates to an extra £4,971 of interest payments on an average mortgage debt.

“While in recent years, any mortgage rate hikes reverted to their previous level within a few days, this has not been the case this time around,” says uSwitch money expert Tashema Jackson.

For some borrowers, it will be disconcerting that these changes are coming well before any decision has been made by the central bank.

The uncertainty around what the Bank of England will do regarding interest rates, and the knock-on effect that will have on mortgages, means that fixing your monthly repayments could help provide some certainty to your finances in the meantime

Mark Carney told the BBC that he was more focused on the general path than the precise timing of interest rates, meaning rates should maintain an upward trajectory over the next few years.

The high street banks, it seems, are preempting the general ascent of the base rate.

Ishaan Malhi, chief executive of online mortgage broker Trussle, points out that mortgage lenders change their rates when they anticipate a change in market conditions. “The base rate is one contributing factor, and when it increases, the cost of borrowing across the finance sector typically increases too. These increases are ultimately then passed on to borrowers.”

But it is possible that some rate increases from high street banks have not been linked to the upcoming BoE decision at all.

“Lenders dont just increase their rates when the Bank of England does,” says Jenny Watts, chief operating officer at online mortgage adviser Dynamo. She suggests another cause behind the mortgage hike could be that the cost of funding for lenders has increased after the government called time on the Term Funding Scheme in February this year. “Some lenders have passed this cost onto their customers, which is why some will have seen their mortgage payments increase before any Bank of England rate rise,” Watts adds.

As well as changing their rates, weve started to see high street lenders remove their lowest fixed-rate mortgage deals over the past two months, with uSwitch figures indicating that the new cheapest deals have been anywhere between 0.25 per cent and 0.3 per cent higher than what was on offer at the start of the year.

This means that those taking out a mortgage today may see typical payments £250 higher a year than if theyd taken a deal earlier.

“This wont be the case for everyone, however, as the immediate impact will vary depending on the type of mortgage you hold,” says Jackson, pointing out that homeowners on a fixed-rate deal, which is still within that initial fixed period, will see no immediate change to their monthly repayments.

However, when your fixed-rate deal ends and you look for a new one, youre likely to notice the rates on offer will be higher compared to when you last shopped around, Jackson warns. The money expert also says the impact on those with tracker-rate mortgages is likely to be more instant, with repayments increasing immediately following any rise in the base rate of interest.

More worrying is the 4.5m people in the UK – which is a third of all mortgage holders – who are paying their banks standard variable rate (SVR).

While these borrowers may have found these repayments manageable so far, Jackson says now is the time to start thinking about whether a fixed-rate deal is suitable.

“Given the trend of rising interest rates on fixed-rate mortgages, any increase in the base rate could trigger further rises from banks and mortgage providers,” she says.

“The uncertainty around what the Bank of England will do regarding interest rates, and the knock-on effect that will have on mortgages, means that fixing your monthly repayments could help provide some certainty to your finances in the meantime.”

Admittedly, the cheapest fixed-rate deals are no longer at the historic lows of the past two years, but mortgage holders can still find an offer to fix their mortgage for less than every banks current SVR.

Even if rates dont go up, research from Dynamo shows that switching from your lenders SVR to a fixed-rate deal could save you an average of £253 per month, or more than £3,000 a year.

Read more: Will UK interest rates rise in May?

If you are on your lenders variable rate, or if you are due to remortgage later, then panic not.

Malhi says any rate rises will be gradual. “If rates do go up in May, its likely to be by 0.25 per cent, which for the average homeowner amounts to a little over £200 increase per year,” he adds. But the Trussle founder also recommends that anyone on a tight budget review their finances to work out where theyre going to find the money to cover the increase in repayments.

Its not too late to find a good deal, as there are still some low fixed rates available in the market. “Your next step should be to speak to a mortgage adviser to chat through your options,” says Watts.

Also bear in mind that a lower rate doesnt necessarily mean a better deal, as fees should be factored in too. Watts echoes this, saying: “Dont be lured purely by the cheapest rate – often a low teaser rate will end up costing you more in the long run.”

But if you are nearing the end of your current deal, look into switching sooner rather than later so you dont get hit by the stampede of higher rates when they inevitably rise.

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