Mortgage costs: what to do about soaring monthly bills

Almost two million people will need to remortgage next year and face a difficult decision over what to do next.

It’s been a horrendous couple of weeks for anyone in the process of arranging a mortgage.

One of the big fallouts from the mini Budget, and the subsequent fall in the value of the pound, was the rapid repricing within the mortgage market.

A host of lenders pulled deals with no notice, leaving borrowers in limbo, and while most lenders are at least active once more, borrowers face a restricted choice and far higher interest rates on their borrowing.

To put that into context, according to data from financial data site Moneyfacts, within a week of the mini Budget, the number of products available dropped from 3,961 to 2,340.

Meanwhile, the average interest rate on a two-year fixed rate has risen from 4.24% in the middle of September to over 6%.

While you can actually get a cheaper deal over five years, with fixed rates at an average of 5.97%, this is still up markedly higher than you could have secured a couple of weeks ago.

It's also been a disaster for those about to buy a home or remortgage, many of whom had not quite gone through with an application and now face a much more expensive deal.

So, pain all round then - and there could be more to come.

More rate hikes on the cards

It’s worth remembering that the incredible rate increases we have already seen may not be finished yet.

Lenders base the pricing of their fixed-rate mortgages on swap rates ‒ essentially the cost they face of their own borrowing over longer terms.

Swap rates aren’t directly linked to Bank Base Rate, but rather what the markets expect to happen to Base Rate over that term.

That’s why merely the talk of Base Rate hitting 6% next year has led to such massive rate increases over the last couple of weeks, even though in actual fact Base Rate is still at 2.25%.

If it becomes more likely that Base Rate will indeed hit that point, or even higher, then we may see further increases to borrowing costs.

Your options if your mortgage isn't about to expire

We've already written this week about what you can do if your current mortgage deal is almost at an end - you can read it here - but what should you do if your mortgage still has a while to run?

UK Finance estimates that around 1.8 million homeowners will come to the end of their fixed-rate deal in 2023. 

If you're among them, let's run through your options.

1. Paying to switch

Given that rates are on an upward curve, it’s perhaps no surprise that plenty of mortgage borrowers are paying exit fees to get out of their existing deal today, and to secure a new, longer-term fixed-rate deal.

There is short-term pain here, given the rate that borrowers are moving onto will be higher than their current rate.

That means an increase in the size of their monthly repayment, just at a time when household finances are under pressure.

There’s also the small matter of early repayment charges, which are calculated as a percentage of the outstanding sum still owed on the mortgage, and so can run into the thousands.

However, with rates potentially heading even higher in the months ahead, some borrowers will undoubtedly feel it’s better to take the hit now in order to avoid further pain down the line.

Indeed, it’s a choice I made myself just a couple of months ago, as I detailed here on loveMONEY.

2. Lock into a new deal in advance

At times like this, a quality mortgage broker can really make a difference to your chances of securing a deal that you can actually afford - even if it represents an increase in your monthly outgoings.

Brokers are better placed than ordinary borrowers when it comes to recognising which lenders are genuinely open for business, and can turn around an application in a relatively quick time.

They can also help you time any moves to maximum effect.

Richard Campo, founder of broker Rose Capital Partners, pointed out that some lenders allow you to book in a new rate up to nine months before your existing deal ends.

You can get that rate set up, but not actually go through with the change until later on, allowing you to maximise time on your current, lower rate.

What’s more, if things settle down and rates start to fall again, you can cancel the application and reconsider your options.

As he puts it: “The reality is we just don’t know how things will play out, but to give you the certainty of locking into today’s rates and giving you six months plus to wait and see what happens just seems sensible to me.”

3. Play the long game

Another option for borrowers facing a painful increase in the size of their repayments may be to extend their mortgage term.

For example, if your mortgage is currently due to be paid off over 25 years, you could look to move that to 30 years.

The big selling point here is that it will cut the size of your monthly repayments.

For example, on a £200,000 mortgage at 6%, a 25-year term would mean monthly mortgage repayments of £1,289. But moving to a 30-year term would see that drop to £1,199, almost £100 a month less.

There is a big downside, however, in that extending the term means the mortgage will cost more overall.

After all, you’re paying interest on that debt for a longer period. In this example, a 30-year term would cost you £431,676 overall, compared with £386,581 over a 25-year term.

However, should things settle down and rates fall once again, you would at least have the option of reducing your term once again, or at least making voluntary overpayments which would mean you could trim the time taken to clear the debt.