Keeping the crisis from your door...
As mortgage rates rocket, HARVEY JONES reveals how homeowners and first-time buyers can get a grip on higher borrowing costs
HOMEOWNERS have enjoyed rock-bottom mortgage rates for more than a decade, but those days may be drawing to a close.
Earlier this month, the Bank of England increased lending rates for the second meeting in a row and banks are already hiking mortgage rates as a result.
Years of record-low borrowing costs have slashed the amount people pay on servicing their mortgage, in a real boon for borrowers.
But cheap money has also driven house prices to all-time highs, forcing buyers to take out everlarger loans.
Many who have borrowed to the maximum will be feeling nervous as rates climb, fearing they will be overstretched as rates go higher.
And rise they will, as the Bank of England looks set to hike base rates three or four more times this year to contain raging inflation.
Regardless of whether you are a homeowner or first-time buyer, you need to gear up for the new world of higher borrowing costs.
We are living in changing times
Homebuyers and owners can still get mortgages charging under 2% a year, so grab them while you can.
Many younger buyers have known nothing but cheap mortgages, yet rates have been far, far higher in the past and could be again.
Martijn van der Heijden, chief financial officer at mortgage broker Habito, said: “Anyone who’s bought a home in the last 13 years has only known base rates of 1% or below.
“These low rates are disappearing fast.”
The Bank of England’s Monetary Policy Committee voted to increase base rates to 0.5% recently, but four out of nine members wanted to jack them up to 0.75%, says Laura Suter, head of personal finance at AJ Bell.
This is only the beginning, with markets expecting base rates to hit 1.5% by early next year.
“Nobody should think the Bank is going to stop after just two increases,” Laura says.
The BOE is doing this to keep a lid on inflation, which it now reckons will hit a staggering 7.25% in April, and higher borrowing costs will only worsen the cost of living crisis.
Increasing base rate to 0.5% will cost someone with a £250,000 variable rate mortgage an extra £384 a year, Laura says.
“If base rates hit 1.5%, they will pay an extra £1,956 a year, or £163 every month.”
This is on top of rising food, energy, council tax and National Insurance bills. If that will destroy your budget, it may be time to protect yourself by taking out a fixed-rate mortgage.
More to come
More than a million borrowers are already paying more for their mortgage, as lenders increase their standard variable rates (SVRS) in the wake of Bank of England hikes.
Nationwide said it will increase its SVR by 0.25% from March 1 to 3.99%, while Santander will increase its SVR to 4.74% on the same date. Others will surely follow.
The SVR is the rate you revert to after your original fixed or discounted rate deal expires, and is likely to be as much as 4% or 5%, far higher than today’s best-buy rates for new customers.
You do not want to pay that any longer than is necessary.
While Santander’s SVR is now 4.74%, it offers two-year fixed rates from just 1.44%, and most other lenders have simi- lar pricing.
Homeowners save an average of £3,500 a year by remortgaging, according to research from online broker Trussle, equivalent to 15% of the
UK’S average salary.
If you’re considering a remortgage it might be better to do it sooner rather than later, according to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
“In January, new fixed-rate deals rose for the third consecutive month and we can expect these to keep shifting northwards.”
Yet there are still deals to be had, says David Hollingworth, associate director at mortgage brokers L&C.
“Fixed rates are likely to remain by far the most popular product and five-year rates can be found from just over 1.50%,” he says.
If you are already locked into a deal, don’t switch before the end of the term, as you will incur an early redemption charge, which could run into thousands. But be ready to switch the moment it ends, before you revert to your lender’s SVR.
“Lender offers can be valid for up to six months, enabling borrowers to secure a rate now even if their existing deal still has several months to run,” he adds.
Consider a longer-term fix
Now could be the perfect time to lock into a long-term fixed-rate mortgage. For example, HSBC charges 1.61% up to 60% loan-tovalue, but with a relatively high product fee of £1,499.
Santander offers a five-year fixedrate at 1.64% up to a maximum loan-to-value of 75%, with a £999 fee.
Which deals work best for you will depend on the size of your mortgage, so do your sums.
The larger it is, the more you will save from a lower rate.
While most people opt for two or five-year fixes, there is a growing choice of 10-year fixed rates, says Adrian Anderson, director of property experts Anderson Harris.
Rising demand is driving lenders to offer more 10-year fixed-rate products too.
“Halifax has launched a 10-year fixed rate for homebuyers with a 40% deposit charging just 1.68%, while Lloyds has an even more competitive rate of 1.66%,” says Adrian. “Both require deposits of 40%.”
If base rates return to more normal historical levels of around 5%, mortgage rates would climb to about 7%. In that scenario, today’s 10-year fixes could end up being fantastic value.
However, only lock into a 10-year fix if you are confident that you can last the course. If you have to move house and need to borrow more, there is no guarantee your lender will allow that.
There are redemption charges for pulling out of a 10-year fix early, which can be as much as 5% of your mortgage in the early years.
First-time buyers
Higher mortgage rates will be yet another blow for first-time buyers scrambling to raise a deposit, further reducing affordability, says North London estate agent Jeremy Leaf.
“This will deter some from taking that first step on the ladder and dampen property price growth, as firsttime buyers are the lifeblood of the housing market,” he adds.
Lenders have tightened mortgage affordability criteria and will want to scrutinise your monthly spending even more before deciding how much to lend you, says Miles Robinson, head of mortgages at online broker Trussle.
“Energy prices have increased by such an extent that lenders now take utility costs into account during mortgage affordability checks, which may hit first-time buyers with smaller deposits hardest,” Miles adds.
Right now, first-time buyers face the worst of all worlds, as interest rates, living costs and house prices are still climbing, up 9.7% since January last year, according to latest Halifax figures.
Interactive Investor’s personal finance campaigner Myron Jobson says rising rents are making life even harder.
“The outlook is bleak for those who are paying a huge chunk of income on rent while struggling to save for a deposit without the help of the Bank of Mum and Dad,” he says.
If you’re considering a remortgage it might be better to do it sooner rather than later