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These are nervous times for mortgage borrowers. Every Truth Social post from Donald Trump or policy promise from a Labour leadership hopeful has the potential to make everyday life more expensive for the 1.8mn UK households refinancing home loans this year.
The Bank of England has held steady on interest rates since the start of the year, but UK mortgage lenders have repriced more sharply than those in the US and Europe, anticipating that global inflationary pressures and domestic political upheaval will keep the cost of borrowing higher for a lot longer.
The average five-year fixed-rate mortgage currently stands at 5.67 per cent, according to Moneyfacts, compared with 4.91 per cent at the start of this year. Based on a £500,000 repayment mortgage, this has added £225 to the monthly cost in the space of six months.
Yet for those rolling off pandemic-era rates of 2.5 per cent, monthly repayments are likely to be nearly £900 higher. Crumbs. The chancellor’s pledge this week to lower the price of biscuits and other shopping basket staples will do little to insulate borrowers from this “rate shock” — so what else can they do?
Extending the mortgage term is an option for those who are young enough, and one made easier by the Mortgage Charter introduced in the wake of Truss-era rate shocks. Doing so will reduce monthly repayments, but substantially increase total interest charges over the life of the loan. Scarily, one in 10 new mortgages granted is for a term of 35 years or more, silently adding to the long-term cost of living.
However, brokers tell me that borrowers with larger home loans are weighing up “doing the splits” when they refinance, splitting their debt into two portions. One part remains as a standard repayment mortgage, where they pay back capital and interest charges every month. But another part moves to an interest-only loan with the same lender, reducing monthly repayments (some brokers call this a “part and part” mortgage).
“A lot of City workers are exploring this as a temporary cash flow easing measure while rates are higher,” says Andrew Montlake, chief executive of mortgage broker Coreco. Mainstream mortgage lenders don’t openly advertise part-and-part deals, but brokers can access them. On a large loan, this could reduce monthly mortgage outgoings by a four-figure sum.
Lenders will insist on minimum income levels, a decent slug of equity and a repayment strategy for the interest-only portion of your loan. “Planning to sell the house” could satisfy some, though brokers say an investment account, anticipated pension lump sum, bonus or future inheritance are more commonly cited. “It’s a way of keeping things affordable while they make inroads into paying off the rest,” adds Montlake.
This could be a lifeline for parents being squeezed by childcare costs, which might well cost more per month than their mortgage. But the risks of protracted conflict both in Iran and No 10 do not bode well for the near-term path of interest rates.
Nervous borrowers have responded by trying to get ahead of the game. Since March, brokers report a rush to remortgage with clients reserving their next fixed rate up to nine months before their existing deal expires. Having locked in the best rate they can find, they can then ditch it for a better one should the Strait of Hormuz reopen or gilt markets calm down.
Being organised has saved them money. Those who followed my advice to line up their next fix in the wake of the war could now be rolling on to a new rate beginning with a three. The best deals currently start with a four — and who knows what could happen in the months ahead?
Borrowers with a pre-Iran mortgage rate might think rate shock is a problem they can ignore. “I think that’s a mistake,” says Simon Gammon, managing partner of Knight Frank Finance, who expects rates of 3.5 to 5 per cent to be the “new normal” for many years. He says those who make an effort — however small — to overpay their mortgage every month, or set money aside in savings or investment accounts to do so in future could be surprised at the impact.
Personally, I’ve been using the Sprive app, which pays £2.50 off my mortgage for every £100 I spend at the supermarket. Every little helps!
What about brave souls in the process of buying a home? The race is on to transact before mortgage offers that predate the Iran conflict expire. Given the sharp movement in rates, a new loan would not only cost more, but affordability tests could reduce how much they can borrow.
If buyers cannot afford to fill this gap, or negotiate a price reduction with the seller, then a different kind of split could occur — pulling out of the transaction. Nerves are jangling across the property market.
Claer Barrett is the FT’s consumer editor; [email protected] Instagram @ClaerB