Soaring inflation and the rise in the Bank of England’s base rate have many of us wondering what the future holds for mortgage rates.
If you’re on an adjustable or tracker rate mortgage, an increase in the base rate will likely mean an increase in your monthly mortgage payments.
This is also the case if your fixed rate contract has expired and your lender has switched you to their standard variable rate (SVR). So the repeated base rate increases since October of last year could have increased your household bills significantly. Standard variable rate mortgages have seen the biggest monthly rate hike since at least 2007, according to Moneyfacts. The average SVR rose 0.15% to 4.61% in early March.
It’s time to consider a new deal
Many borrowers will now wonder if it’s time to get a new fixed rate deal before rates rise further. Switching to a fixed rate mortgage could at least provide peace of mind that your monthly repayments won’t change no matter what happens to the base rate. If you repair now, you may need to act quickly. You have certainly already missed out on the best rates. “The days of sub-1% mortgages are over,” said George Nixon in The Times. The Bank of England’s base rate has been hiked three times, from an all-time low of 0.1% to 0.75%, and is expected to hit at least 1% this year . Nonetheless, rates remain low enough that the security of knowing that further interest rate increases won’t affect you could still be compelling.
The downside of fixed rate offers is that they usually come with hefty penalties if you want to pay off the mortgage before the end of the term. The aim is to prevent you from changing your mortgage every time rates drop, but that means moving could be expensive if you want to do it for the term – although some lenders allow you to transfer your mortgage to another property. Check your situation before committing.
Five years may be a better value
Two-year fixed rate mortgages tend to be the most popular because they allow you to lock in an interest rate without worrying too much about incurring large fees if you need to switch or move. However, if you’re going to go for a fixed rate now, you might want to bite the bullet and fix for a longer period of time. This is because two-year rates have risen in line with the base rate. The best rate you can get today is 1.59% from Reliance Bank.
That said, five-year fixed rates have also risen – the best offer is 1.82% from Lloyds Bank, up from 1.29% six months ago. This equates to an extra £50 per month on a £200,000 mortgage.
A longer solution
However, if you’re very settled in your home and don’t plan to move, a ten-year solution is looking more and more advantageous. “While average two-year fixed mortgages have followed the rise in base rates…ten-year fixed rates have seen a much slower move,” says Michael Brown of Moneyfacts. “Since the beginning of February, the average ten-year fixed rate mortgage has increased by 0.03%. By comparison, the average two-year fixed rate increased by 0.26% over the same period. The best ten-year rate is 1.95% fixed until 2032 with Halifax. The maximum loan-to-value (LTV) ratio is 60% and the product fee is £995. On a £200,000 mortgage, the Halifax deal would cost £843 a month. That’s just £35 a month more than the best two-year contract. Whether this is the right deal for you, however, will depend on your personal circumstances and whether you are confident that you will no longer need to switch. The price of such a long term solution is a prepayment charge of 6% in the first five years.
If you’re worried about rising interest rates, but you’re already locked into a fixed rate mortgage, you can always prepare. “Even if you’re months away from the end of your fixed contract, talk to a bank or mortgage broker to lock in a new rate now,” says Nixon. Most lenders will allow you to agree a new rate six months before the end of your transaction.