How to shelter your wealth in the new era of rocketing rates
All of a sudden, borrowing costs are shooting up while savings rates stagnate and markets plunge. But don’t panic — our three-page guide shows you . . .
THE clock is ticking on rising interest rates, with the next big decision arriving in just 43 days. The Bank of England base rate is already at its highest point in 13 years. And its ascent is expected to be more aggressive than was previously forecast, with analysts now expecting it to hit 3 pc by the end of the year.
After more than a decade of ultracheap borrowing costs, this sudden change of direction is set to come as a shock to many households.
So here, Money Mail explains exactly what this means for you — and, crucially, how you can shield your family finances from the storm ahead.
WILL MY MORTGAGE BILLS RISE?
THE majority of homeowners have a fixed-rate mortgage so won’t suffer an immediate financial blow.
But around 1.3 million borrowers have deals due to end this year. And when they come to remortgage, it’s likely their monthly bills will shoot up.
There are also around two million borrowers with variable-rate home loans, which can move up and down.
If you have a tracker deal, any change will be immediate. But if you are on a default or standard variable rate, increases will depend on your lender.
WHAT’S HAPPENED TO RATES?
DAvID HOLLINGWORTH, associate director at broker London & Country Mortgages, says rates have been moving at an ‘astonishing’ pace.
Banks have certainly been quick to push up their variable rates — with an average rise of 0.5 percentage points since last year, according to data analysts Moneyfacts.
But not all providers have hiked costs. Coventry and Skipton building societies say they will not be passing on the latest rise to their variable-rate customers.
Elsewhere, some lenders may still be catching up after five consecutive base rate increases. for example, virgin Money’s standard variable rate is 5.24 pc; at HSBC it’s 4.04 pc.
But the latter has not announced any changes since the interest rates rose in May, so it could still move up in the months ahead.
Meanwhile, ultra- cheap fixed rates have all but disappeared — though are still low by historic standards.
Average two-year fixed rates have climbed from 2.34 pc in December to 3.25 pc. And the lowest two-year rates from the top ten lenders have also trebled on average since October last year, according to L&C. The average among the cheapest is now 2.71 pc, up from 0.89 pc nine months ago.
IS NOW THE TIME TO REMORTGAGE?
If YOU are on a fixed-rate deal, sit tight as your monthly payments will remain the same until the end of the term. Otherwise there may be costly exit fees.
If your deal is due to end soon, you can search for a new offer up to six months before.
More than one million homeowners are on their lender’s standard variable rate, which is typically much more expensive. But there are no early exit fees. So if you have no plans to move home, it would make sense to lock into a fixed deal.
A two-year fix is typically 1.66 percentage points cheaper, according to Moneyfacts. On a £200,000 mortgage you could save £4,418 over two years. Contact a free mortgage broker for sound advice based on your own circumstances.
FOR HOW LONG SHOULD I FIX?
EXPERTS say five-year fixed rates are proving most popular — and for good reason. The margin between the average two and five-year deal — at 0.12 percentage points — is the narrowest it’s been since february 2013.
And with a two-year term you risk being exposed to higher rates sooner. You may also have to pay a fee to remortgage again.
Ten-year fixed-rate deals are also competitive, with rates as low as 2.73 pc. But a lot can change in that time and there are big penalties if you need to break free early.
for those considering if they should ditch their variable rate early, the maths can be fiddly. Savings will depend on how much more you will pay as rates rise, how much longer your mortgage has left to run and any penalties for leaving. Both discounted mortgages, which are linked to a lender’s standard variable rate, and tracker mortgages, often pegged to base rate, can also come with early repayment charges.
ARE TRACKERS EVER RIGHT?
IT MAY feel that no one will be considering a variable mortgage in light of recent rate rises and the threat of more to come. However, the gap between fixed and variable deals is widening. for example, Newcastle BS currently offers a two-year discounted rate at 1.5 pc for borrowers with a 20 pc deposit. By comparison, the cheapest twoyear fixed deal with virgin Money is 2.74 pc.
But if interest rates climb or Newcastle increases its standard variable rate, the former could suddenly get more expensive.
Mr Hollingworth, of L&C, says: ‘Some borrowers may think it is enough of a margin to work out cheaper over two years, especially if they don’t think rates will rise as
rapidly as some expect. These deals could also appeal to those who want more flexibility.’
IS IT BEST TO SWITCH MY LENDER?
SOARING interest rates and living costs could lock some borrowers out of the best deals with alternative providers.
Emma Jones, broker and owner of alder Rose Mortgage Services, says a client was recently rejected by four lenders.
The homeowner earns £33,000 a year, but had taken a six-month payment holiday in the pandemic. In the end, only her current lender offered her a remortgage deal.
Switching to a new rate with the same provider is called a ‘product transfer’.
‘The beauty is that unless you’ve missed a mortgage payment, your existing lender is unlikely to make you reapply. They will simply transfer you to a new rate,’ says aaron Strutt, of broker Trinity Financial.
This could bring relief to people whose circumstances have changed — for example, if you are now self-employed or have taken a pay cut. From august 1, the Bank of England is also ditching a stress test that requires borrowers to prove they can afford a loan if rates jump. Lenders still need to follow affordability rules set by the City regulator, but in theory it could make it easier to move to another lender.
COULD I BECOME A MORTGAGE PRISONER?
SOME homeowners fear relentless base rate increases could put them at risk of becoming ‘ mortgage prisoners’. These are homeowners who are pushed onto their lender’s expensive standard variable rate (SVR) but can’t switch away because they cannot pass affordability rules.
Hundreds of thousands of people ended up in this position shortly after the 2008 crash.
Rachel neale, of UK Mortgage prisoners, says around 15 people are joining her group every day — up from about five a few months ago.
However, experts say a second generation of mortgage prisoners is unlikely, because lenders rarely carry out affordability checks on their existing borrowers.
WILL THERE BE DELAYS IN MY APPLICATION?
LENDERS are facing a backlog of applications as borrowers rush to snap up cheap rates. Mark Harris, chief executive of mortgage broker SPF private Clients, says: ‘Service can be poor. Straightforward “vanilla” cases tend to fly through, while those which are more complex inevitably take longer.’
Timing is crucial. If you apply too early, an offer could expire before you’re eligible to move onto it; wait too long and delays could mean more time spent on your lender’s SVR, which costs more each month.
Ensure you have all the paperwork you need to hand and check your credit report ahead of making an application. If there is anything to be improved or brought up to date, it’s better to know sooner rather than later.
HOW ELSE CAN I FIGHT RATE RISES?
OVERPAYING on your mortgage is not an easy task as other bills soar. But for anyone able to pay a little more, even £1 a day can make a difference.
an extra £30 a month would shrink the interest bill on a typical £150,000 mortgage taken over 25 years by £4,545 (based on a rate of 3.25 pc). you would also clear your mortgage one year and five months early. and overpayments can help you access better rates in the future.
Offset mortgages are another option. Savings are held in an account linked to your mortgage. But rather than earning interest, the sum is used to reduce that owed on your home loan.
WHAT IF I CAN’T AFFORD PAYMENTS?
SUE ANDERSON, of StepChange debt Charity, which offers mortgage arrears advice, says: ‘Rather than waiting, hoping the situation will improve, ask your lender for help.’
Home repossessions are on the rise again after plummeting during the pandemic. Mortgage possession claims — where lenders begin legal proceedings to take control of a home — jumped by nearly 300 pc between January and March this year compared with the same period in 2021, according to figures from the Ministry of Justice.
The number of actual repossessions carried out by county court bailiffs rose from three to 571 in the same time period.
The increase is largely down to the fact lenders were banned from taking the action against homeowners between March 2020 and april 2021.
The Financial Conduct authority is writing to more than 3,500 lenders this month to remind them of their responsibility to support struggling borrowers.
depending on your circumstances, your lender may move you temporarily to an interest-only mortgage, or extend the term of your loan to bring the monthly payment down.
There is also help on the government’s website, moneyhelper.org.uk. and you can call Citizens advice on 0800 144 8848 or StepChange on 0800 138 1111.
WHEN IS THE NEXT RATE RISE?
THERE are four more Bank of England base-rate announcements this year — in august, September, november and december.