The Bank of England has held the Bank Rate at 5.25pc since August, which has likely been causing disappointment to many who were hoping it would reduce its lending rate from the current 15-year high and bring mortgage prices down with it.
The mortgage market has been in flux as inflation and wage growth figures have led to uncertainty about when interest rates are likely to fall. The market is currently pricing in the first cut for June, buoyed by recent positive language from Andrew Bailey, Governor of the Bank of England.
High street lenders including Santander and NatWest have been regularly updating prices across their mortgage ranges as swap rates – the main pricing mechanism for fixed-term mortgages – have fluctuated.
Currently, the average two-year fixed rate mortgage is 5.92pc, and the five-year average is 5.49pc, according to analyst Moneyfacts.
Compared to the cheap rates many homeowners may be coming off, thousands are finding their monthly mortgage bills increasing by hundreds of pounds.
This guide will help homeowners navigate the ongoing uncertainty, whatever their circumstances.
What should you do if you’re about to remortgage?
An estimated 800,000 fixed-rate mortgages need refixing this year, and 1.6 million next year, meaning potentially huge increases in payments.
Homeowners can often secure a new fixed offer up to six months before their deal expires, said David Hollingworth, of broker L&C Mortgages, and this does not commit you to taking up the offer.
You can later opt for a different deal if a better one comes along. With many fixed rates still increasing, it could be worth getting a remortgage offer in place as soon as you can.
However, 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.
The average tracker rate is currently 6.12pc, according to Moneyfacts.
Those who are considering fixing their deal should think about their future plans. People aiming to sell within three years may want to stick with a two-year fix rather than a five-year deal so they have more flexibility when they move.
What should you do if you’re on a tracker mortgage?
Tracker, also known as variable-rate, mortgages follow the direction of the Bank Rate, meaning they could be favourable if interest rates are falling – but could prove costly in a climate of rising rates.
Adrian Anderson, of broker Anderson Harris, said those who have a more comfortable financial position, and would be able to cope with an increase in outgoings should consider trackers, he explained, while those who want certainty over the costs should look at fixing.
He added that some people are considering trackers with no exit penalties. This means that if the fixed-rate market becomes more favourable they could switch without having to pay costly exit fees.
Be aware that there is no ceiling on how high repayments on a tracker deal could rise, and their volatile nature means they are not appropriate for households that prize certainty over savings.
What should you do if you’re on a standard variable rate?
Standard variable rates (SVR), which borrowers are moved to automatically if they do not remortgage when a fixed deal ends, are the most expensive. The average SVR is 8.18pc, according to Moneyfacts.
If you are on an SVR you should always try to switch to another rate if you can, Mr Anderson said. Some tracker rates are available without penalties so homeowners should see if they can qualify for one of these before opting for an SVR because they are cheaper.
The one exception is for homeowners who intend to sell in the near future and don’t want to pay any penalties to break out of a 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.
I’m on an interest-only mortgage and I can’t afford it. What should I do?
Interest-only mortgages, where homeowners do not clear the underlying capital on their loan but instead just pay the accrued interest, have grown in popularity.
Over the term of the loan, interest-only borrowers typically pay down the capital in chunks – using bonuses, commissions, or windfall inheritances.
Any equity which builds up in the house over time through house price growth can also be used to pay the capital back if the exit plan is to sell at the end of the mortgage term.
As monthly repayments tend to be lower for interest-only deals, those who will be unable to afford an increase in their rate are left with very few options. Switching to a repayment mortgage would mean that monthly payments would increase even more.