More borrower woes – but what can I do?
Another shock in UK mortgages last week saw HSBC pull new deals at four hours notice.
After May’s rate hike to 4.5%, lenders — even big ones — do not want to have the cheapest deals in town a) because it increases their exposure and b) because departments may buckle under the weight of customers frenziedly trying to land the market’s best deal.
When we say increases their exposure: rates may increase again in June, and some predict worse to come by year’s end so lenders don’t necessarily want to get tied into rates today when tomorrow’s so uncertain.
The mortgage situation is a massive source of anxiety right now. And it’s not just homeowners but tenants too: higher rates reflect in higher rents, not least because private landlords are opting to exit the game and the rental pool is shrinking.
Rates and realities
As you probably know, repayment mortgages usually land as fixed rate (fixed for 2, 3, or 5 years, say), while Standard Variable Rate (SVR) and ‘tracker’ mortgages follow the bank’s own interest rate policy (SVR) or the Bank of England’s base rate (tracker).
Borrowers will always pay slightly more for fixed rate deals than variable ones because it won’t change; it’s a known outgoing set in stone for the duration – and that’s appealing. Still, variable doesn’t automatically mean bad as it can go down as well as up. So long as borrowers leave headroom in the budget they can mitigate for rate / price increases.
After a few years in financial planning, it’s my experience that lenders see fixed rate deals as more of a win. It’s a higher guaranteed income that’ll be especially lucrative if rates fall – because the borrower is locked in. At the moment, it may be fair to say that lenders are trying to charge over-the-odds to lock people into fixed rate deals.
But again, the payoff for the borrower is arranging a known outgoing. And given analysts reckon the base rate my rise to 5% or even higher by the end of the year, a fixed rate may start to look like the best of a bad bunch. There are apparently 1.4m homeowners about to finish their fixed term deals and the market as it stands isn’t pretty. The ONS reckons mortgage repayments are up 61% on the average UK semi-detached home.
MoneySavingExpert has a calculator so you can work out how your own mortgage is / will be impacted.
Below we show an example of the impact by assuming the mortgage (a repayment mortgage) is 75% or less of the value of your house:
2 year fixed at 5.94%
Over 23 years: £665 increase per month per £100,000
Over 33 years: £576 increase per month per £100,000
5 year fixed at 5.59%
Over 23 years: £645 increase per month per £100,000
Over 33 years: £554 increase per month per £100,000
Two-year variable rate of 5.15%
Over 23 years: £619 increase per month per £100,000
Over 33 years: £525 increase per month per £100,000
What can I do?
The best option for anyone who’s fixed rate is due to expire soon is to act early. The ‘do nothing’ option is not advised as Standard Variable Rates can be as high as 7.99%.
So look at when your current deal expires and start in good time. It’s less hassle to stick with your current place so first check out what they can do for you. Use their offer as your benchmark before shopping around.
Consider using a mortgage broker who knows the market and can hunt for deals on your behalf. A good broker will charge circa £500, and they’ll take the rest out of the lender’s end.
Be mindful, too, of the fees involved. Do your sums with and without fees to understand if you’re actually saving anything over the deal term. Say, for example, a five year deal costs you £1,000 in fees for a saving of £15 per month …
Over five years you’ll save £900, so it’s not worth it. People often add the fee to their borrowing but this also means paying interest on that £1,000.
It’s worth saying, too, that there’s not much silver lining at the moment. But while peak rates of 5% or more looks pretty dire … rates hit 17% in 1979.
All any of us can do is stay on top of mortgage news, interest rate changes, and, most crucially, have a clear line of sight on your current deal and when it expires. Moving early is the best option in a sea of unappealing ones.