21 Jun Mortgage Rate Survival Kit
Interest Rate Survival Kit
It is expected that the Bank of England will increase its central interest rate to 4.75% on Thursday, which is likely to have a significant impact on the economy and millions of homeowners. This will be the most substantial economic effect since the financial crisis.
According to Capital Economics, fixed mortgage rates are expected to hit a maximum of 6.5%. This would lead to an extra £336 per year in repayment for individuals with an average mortgage debt of £127,000, in comparison to current rates.
Despite economists’ predictions of a decline in inflation for May, the actual outcome proved them wrong. As a result, major lenders have had to make adjustments to their mortgage offerings, leading to the withdrawal of numerous deals. These deals are now being relaunched at significantly higher rates.
For homeowners, this guide provides assistance in navigating through any storm situation, no matter their circumstances.
Around 800,000 fixed-rate mortgages are set to expire in the next six months, followed by an additional 1.6 million next year. This may lead to significant payment hikes for homeowners.
However, homeowners can now secure a new fixed offer up to six months before their current deal expires, without any obligation to accept the offer. If a better offer becomes available, homeowners can opt for it instead. Given the increase in fixed rates, it would be wise to secure a remortgage offer as soon as possible.
Fixing now is expensive, so you may be tempted to opt for a variable deal which tracks the Bank Rate. But this means you could come unstuck if the latter increases even further.
According to analysts at Moneyfacts, the average two-year fixed rate has increased from 2.59% to 6.15% in the past two years. Similarly, five-year deals have risen to 5.79%.
When considering a mortgage, remember to consider your future plans. If you anticipate selling your property within three years, choosing a two-year fixed deal may be wise instead of a five-year one. This will provide you with greater flexibility when the time comes to move forward with your plans.
Variable-rate mortgages, commonly referred to as trackers, are linked with the Bank Rate. This means that they can be advantageous when interest rates decrease, but may result in higher costs if rates rise.
Currently, trackers are more affordable, and this trend is expected to continue in the upcoming weeks. However, the scenario could change by the end of the year, making fixed rates more cost-effective than trackers. Trackers continue to be a popular choice for those seeking flexibility, but they may not remain as affordable as fixed rates for long.
It’s tough to hear that tracker rates are currently sitting at an average of 5.49%. And to make matters worse, economists are predicting that these rates could increase by another 1.5 percentage points if the Bank Rate hits 6% by the end of the year. If this happens, tracker rates could hit around 6.99%, which means that the average household would need to pay an extra £1,416 annually in repayments. It’s important to keep this in mind as you make decisions about your finances.
When it comes to payment preferences, some individuals tend to prefer fixed rates as it provides them with payment stability, while others may opt for trackers as it offers them flexibility with their payments.
Based on our opinion, it may be advisable for those with a secure financial situation and the ability to manage increased expenses to give trackers some thought. Conversely, for those seeking peace of mind in terms of costs, exploring fixed options may be worth considering.
It’s important to note that tracker deals do not have a limit on how high repayments could rise, and their fluctuating nature may not be suitable for households seeking stability over potential savings.
It is worth noting that borrowers who do not switch to a new mortgage deal once their fixed term ends may be automatically transferred to a Standard Variable Rate (SVR). Unfortunately, these rates are typically the most expensive, with an average rate of 7.49%.
MDFS suggests that it may be beneficial to consider alternative rates, such as tracker rates that do not incur penalties, before opting for an SVR. However, there may be exceptions for homeowners who are planning to sell their property soon and wish to avoid penalty fees for ending their current deal.
A very small number of borrowers may find they cannot switch from the SVR, perhaps because they are in negative equity or if there are penalties for doing so.
It’s understandable that homeowners are considering interest-only mortgages as a way to manage their finances. By only paying the interest accrued on their loan, they can keep their monthly payments lower.
However, it’s important to remember that the underlying capital still needs to be paid off eventually. Many people plan to do this by using bonuses, commissions, or inheritances, or by selling the property at the end of the mortgage term.
For those who can’t afford an increase in their rate, switching to a repayment mortgage may not be an option, as it could lead to even higher monthly payments. It’s a tough decision to make, and we’re here to help you navigate your options.
Consider a mortgage holiday if you can’t pay your mortgage or have a temporary income reduction. This lets you put payments on hold temporarily. Those taking this option should remember that monthly interest will continue to accrue on the loan.
Acting promptly is crucial for finding a permanent solution.
If you ever find yourself facing challenges in a housing market that’s on the decline, it’s important to take action sooner rather than later. It can be overwhelming to deal with situations like an interest-only mortgage increasing from 2% to 6%, especially if it’s unaffordable.
But there are options available for you to consider, like potentially downsizing your property. It’s important to explore all your options and make the best decision for your unique situation. It appears that more and more borrowers are opting to take in lodgers as an additional source of income.
Landlords facing difficulties in keeping up with repayments have various options at their disposal.
One such option is to increase the rent charged to tenants. However, landlords must exercise caution as tenants may not be in a position to afford the additional cost and may opt to vacate the premises. This could result in a void period, which may exacerbate the landlord’s financial woes.
An alternative option for buy-to-let investors is to increase their repayments, enabling them to refinance at higher interest rates.
Additionally, certain lenders may perform a top slice calculation for landlords with a high income. This means that if the rental income fails to meet the banks’ criteria, the landlord can use their own income to offset the perceived shortfall.
The big problem is actually getting the criteria to fit because interest rates have increased significantly over the last 18 months.
The level of stress testing for mortgage rates on buy-to-let properties has significantly increased.
Landlords may find it difficult to refinance their properties from one buy-to-let lender to another, unless their property has a high rental yield or a modest loan-to-value ratio. In such situations, selling their property might be a more feasible option if they are unhappy with the rates offered.
Entering the housing market for the first time can be intimidating, but fear not. Opting for a short fixed-rate mortgage may be the most advantageous choice. Despite the higher cost, it won’t worsen in the short term. Moreover, more affordable options will likely arise when it’s time to remortgage.
Despite the mortgage market’s turbulence, purchasing a home is still more cost-effective than renting.
Our advice is to establish your budget and stick to it when making an offer on a property. Don’t get swept up in the hype, and maintain patience. You’ve got this!
Paying less for the property would also affect your mortgage. In most areas, he said price reductions are common. If a property has not been sold within four weeks and it’s under £500,000, don’t be afraid to make a “cheeky offer” that is well below the asking price.
If traditional methods for lowering mortgage costs fall short, there are alternative options worth exploring. One such option is to extend the mortgage term, which can lead to reduced monthly payments. However, it is crucial to bear in mind that this will inevitably increase the overall amount of interest that will accumulate on the loan.
In the current property market, first-time buyers are increasingly inclined to opt for mortgages with terms of 35 years or longer. For example, a £200,000 mortgage with a 6.15% interest rate would require monthly payments of £1,307. Extending the term to 35 years would reduce the monthly payments to £1,161, but the total cost of the loan would increase from £392,228 to £487,651.
Individuals with repayment mortgages may consider switching to interest-only payments as a means of reducing their monthly expenses. However, it is vital to acknowledge that the capital amount will not decrease over the duration of the loan.