With huge numbers of borrowers coming to the end of a fixed rate in the coming months and facing a jump in their repayments, what can you do now to prepare?
It’s been a tumultuous year for the mortgage market.
Over the space of 12 months, the Base Rate of interest has rocketed from 1.75% to 5.25%.
Mortgage rates have followed a broadly similar pattern, meaning even best buy deals are now well above the 5% mark.
Importantly, many believe it's unlikely mortgage rates will return to the remarkably low levels enjoyed in recent years – at least not anytime soon.
Just last month, Zoopla executive director Richard Donnell said he expects rates between 4% and 5% to become the "new normal".
This could have huge consequences for those who locked into a cheap fixed-rate deal two, three or five years ago as they'll need to prepare for a dramatic spike in monthly repayments.
And we aren't talking about a small number of people either.
Earlier this Summer, banking trade body UK Finance estimated that more than 2.4 million fixed-rate deals would expire before the end of 2024.
So if your fixed term is nearing its end – or if you simply want to start planning as early as possible for the spike in costs – here's what you can do now to prepare your finances.
Book in a new rate today
When you apply for a new mortgage rate, you don’t have to go through with the change immediately. Instead, the rate can be locked in for as long as nine months (depending on the lender) before the switch takes place.
We don’t know exactly what is going to happen with interest rates, which is why it may make sense to lock in that new rate now and then hold fire.
Should rates drop, you can then cancel the switch and instead find a new, cheaper deal.
But if rates remain where they are, or even move higher, you can go through with the switch as planned.
Start overpaying now
Most mortgages allow you to overpay by up to 10% of the outstanding mortgage balance, without charging you for doing so. That could be particularly useful for when the time comes to remortgage.
Lenders price their mortgage range based on the loan to value (LTV) ‒ essentially how the size of the mortgage compares to the value of the property.
By overpaying, you reduce the size of that outstanding mortgage more quickly.
As a result, when you come to remortgage, you may find that you need to lower LTV, and therefore qualify for a better rate.
Look to extend your term
When you take out a mortgage, it is arranged over a specific term.
You might arrange a five-year fixed rate for example, but a 25-year term, meaning that when those 25 years are up the mortgage is paid off.
Lengthening the mortgage term will reduce the size of your monthly repayments, which may make them more manageable if you have no option but to move on to a costlier deal.
So if you had a £200,000 mortgage to repay, over a 25-year term, at a rate of 6% then you’d be looking at monthly repayments of around £1,289.
But moving to a 30-year term would see those repayments drop to £1,199 a month.
The downside however is that those extra five years taken to pay off the mortgage will actually cost you far more overall, on account of the extra interest charges. But it can buy you a little time over the short term.
Trim the fat
The reality is that many people are going to have to find extra cash each month to devote towards their mortgage repayments.
As a result, it’s important for all of us to look afresh at our finances and where we are spending money each month.
It may be that there are certain areas where we can reduce that spending ‒ such as by switching supermarkets or dropping any subscriptions we aren’t making the most of ‒ and then devote the money saved towards those higher mortgage bills.
Find a mortgage broker
Most of the mortgages taken out in the UK each year go through a mortgage broker.
There are good reasons for that ‒ plenty of people aren’t that confident about how the mortgage market works and want to make the most of the expertise of an independent adviser.
You also enjoy far greater choice, since there are numerous lenders who only offer their products through brokers.
It may be that the best deal for you is only obtainable through an intermediary.
The appeal of brokers has only grown through the recent chaos.
The reality is that keeping up with product and criteria changes is going to be beyond those of us who aren’t involved with the market on a daily basis, but a quality broker will be able to steer you towards the lenders most likely to look favourably on an application from you.
Finding a broker now will put you in a better position for remortgaging next year, as they can be a key ally in ensuring you’re on the best possible deal.
Bear in mind that most brokers will charge a fee for their service.
Be prepared
There’s little question that there is going to be real mortgage difficulty ahead.
Difficult decisions are going to have to be made about precisely how we spend our money in order to keep our finances in some sort of reasonable shape.
But by accepting that fact, and going into the situation with our eyes open, we can limit the impact and improve our chances of making the right choices.
Ignoring the dangers ahead and simply hoping they will go away by the time comes to remortgage simply isn’t realistic.