Prepare early to avoid mortgage shocks

There’s no way of getting around the fact that mortgage rates have skyrocketed over the last 18 months but planning well in advance of your current deal ending can help you avoid any shocks.

The Bank of England continued unnerved last month in its long-running campaign to increase interest rates to combat the high inflation which has affected people in a multitude of ways over the last 18 months, perhaps no more acutely than in the price of mortgage products. The latest increment, the 14th successive jump since December 2021, saw the base rate rise to 5.25%.

Yet while it might seem paradoxical, fixed mortgage rates have reduced slightly in recent weeks rather than increased. This is because despite common misconceptions, fixed mortgage prices are typically based less on the base rate today and more on “swap rates”, which are determined by what the markets think interest rates will be in the future. Currently, market expectations are that the Bank of England is nearing the end of its interest rate increases.

If the past year of uncertainty in the mortgage market has shown anything, however, it’s that the economy can perform in an unpredictable way. The one thing you can be certain of is exactly when your current mortgage deal is coming to an end, and therefore it’s incredibly important to understand not just the options available to you but when you can start taking action.

“It’s important to begin looking at renewing your mortgage deal as soon as possible so that you are prepared,” says Marie​ Dalrymple, equity release and mortgage specialist at Ascot Lloyd. “I have just had a client who was on a fixed rate of 1.08% and is now going up to 6%, significantly raising their monthly repayments. People need to prepare themselves and maybe take action now rather than waiting until the last minute when their options will be more limited.

“Many people leave it very late to sort a new deal but that could be quite punishing in the current climate. A lot of people don't realise that with most lenders you can lock in a new deal six months before your current one expires and if rates drop during those six months you can still get the cheaper deal. Even if you move to a new lender then mortgage offers typically last for six months and many allow you to move onto a cheaper rate if one comes up before you complete.”

Should you overpay?

When interest rates are high, the argument for paying down your mortgage more than you need to is heightened. Normally, mortgage lenders allow you to overpay by 10% per year while in a fixed-term product. Your annual 10% penalty-free overpay allowance does not carry forward if you don’t use it, which is another reason why it’s important to plan as far in advance as possible.

When your current fixed product expires you can pay off as much as you like without any penalty, before then moving onto a new deal. If you have sufficient savings to enable you to overpay, it would be wise to have a conversation with your financial adviser who will be able to help you assess, based on your circumstances, whether using your savings to pay down your mortgage at this time could be more beneficial than investing the money elsewhere.

You also may be able to achieve a better rate where the loan to value is better which is another factor to consider. 

The clear downward trajectory of UK headline inflation, which dropped to 6.8% in July from a peak of 11.1% last October, is no doubt a welcome sight to behold. However with prices in certain areas like services still yet to fall, last month the Bank of England said it now believes inflation will not return to its 2% target until the second quarter of 2025, three months later than it forecasted back in May, increasing the likelihood that interest rates will stay higher for longer.

This means those who have been taking a wait-and-see approach, holding off on securing a new mortgage deal in the hope that rates will fall, should reflect on whether waiting any longer will help or hinder. The average SVR, the rate you revert to after your current mortgage deal ends, was 7.85% in August, according to MoneyFacts.co.uk, the highest since April 2008, so continuing to wait in the hope interest rates will fall substantially anytime soon is a risky strategy.

Mortgage Charter

In a recently established agreement, which the government calls the 'Mortgage Charter', major lenders have committed to a set of standards to support borrowers worried about higher rates. Potential options to help reduce your monthly payments could include extending your overall mortgage term, switching to interest-only payments or taking a temporary repayment holiday. 

“It’s important to note there are various consequences that you need to be aware of if you take any of these options, so decisions shouldn’t be taken lightly or without advice,” Dalrymple adds. “However, this is just another example of why you should prepare as early as possible for your mortgage renewal. There are a large number of options and strategies available to help you mitigate the current high-interest environment if you plan early and with robust, tailored advice.”

Taking on a mortgage is a big life decision and remortgaging can be confusing. At Ascot Lloyd, we source products from the whole of the market, with access to advice and special rates that are not available directly. Get in touch to find out how we can help.