All eyes will be on the Bank of England tomorrow as it considers hiking interest rates for the first time in more than three years.
Such a move would signal the end of ultra-cheap loans and send up the cost of millions of mortgages in an instant.
The bank’s base rate has sat at a record low of 0.1 per cent since the beginning of the pandemic in March last year.
Mortgage misery: But as prices and taxes rocket, homeowners can still take huge strides to reduce the cost of their largest household bill
At the time, the bank voted unanimously in favour of a cut from 0.25 per cent, to protect households and business from the havoc Covid-19 would soon wreak on the economy.
But with inflation now tipped to soar above 4 per cent, rates may soon need to rise to keep a lid on spiralling prices. Many major banks and building societies have already pulled scores of the cheapest deals from the market in anticipation.
At the start of last week there were 82 mortgages priced at less than 1 per cent. Yesterday there were just 22 left, according to analysts Defaqto. But as prices and taxes rocket, homeowners can still take huge strides to reduce the cost of their largest household bill.
Money Mail tells you all you need to know about what a rate rise would mean for you and when it is worth sticking or twisting . . .
Tracker tears?
Around 850,000 borrowers are on tracker mortgages which follow the base rate, according to banking trade body UK Finance.
Lenders are required to give base rate borrowers a month’s notice before they adjust their repayments.
Don’t wait: Experts say homeowners should start thinking about switching six months before their term ends, as most lenders will let you reserve a deal from this point
So, if the base rate is hiked, households on tracker deals will not see their costs increase until next month. The average rate on a tracker deal is currently 2.45 per cent.
If the base rate was hiked to 0.25 per cent tomorrow, it would increase repayments on a £150,000 loan taken over 25 years by £12 a month from £669 to £681 — £144 a year — according to analysis by AJ Bell.
If base rate rose to 0.75 per cent by the end of 2023, the same mortgage would cost £719 a month, an increase of £50 a month or £600 a year.
And if the Office for Budget Responsibility’s (OBR’s) worst case scenario occurs, where base rate climbs to 3.5 per cent in 2023, the same monthly bill would be £962 — a £3,516 a year jump.
David Hollingworth, of mortgage broker L&C, says: ‘Not all trackers tie the borrower in, so homeowners may have an option to jump ship without a penalty and lock into a fix if they are nervous about what the future movement of rates could have in store.’
Variable fright
Standard variable rate households are at the mercy of the lenders as well as the Bank of England.
And this means that the 1.1 million homeowners on these deals could see their rates climb higher than any base rate increase, according to Jane King, a mortgage adviser at Ash-Ridge. Lenders still have to give a month’s notice before they alter repayments.
Higher costs: Borrowers who stay on standard variable rate deals could be missing out on savings worth hundreds of pounds a month
Households are rolled on to more costly standard variable rates when their fixed-term ends. But borrowers who stay on these deals could miss out on savings worth hundreds of pounds a month.
AJ Bell figures show households on Barclays’ standard variable rate are paying 4.59 per cent in interest — £841 a month on a £150,000 loan.
If this rate rose in line with the OBR’s worst case scenario, repayments could increase to £1,157.
By comparison, HSBC is offering the cheapest two-year fix on the market at 0.99 per cent for borrowers with a 40 per cent deposit.
Switching from Barclays’ standard variable rate could bring down monthly payments to £565 — a £5,625 saving over two years after the £999 fee is taken into account.
However, thousands of homeowners are trapped on these expensive rates after changes to affordability rules following the financial crisis.
This means ‘mortgage prisoners’ could face even harder times if interest rates soar again and they are unable to move to a cheaper deal.
Rachel Neale, of campaign group UK Mortgage Prisoners, says: ‘We know of people already on standard variable rates as high as 10 per cent and any base rate hike could be the difference between someone keeping their house or losing it.
‘It’s a devastating time for mortgage prisoners, some of whom are living off just £300 a month once their repayments are made.’
Tightening up
Competition has led to historically low rates coupled with generous lending. Several large lenders recently announced they would allow wealthy homebuyers to borrow five-and-a-half times their income — a record high.
At the same time, the cost-of-living crisis is expected to hit how much aspiring homeowners can borrow, and so lenders may retune their affordability calculators.
Income checks: The cost-of-living crisis is expected to hit how much aspiring homeowners can borrow, and so lenders may retune their affordability calculators
Halifax has already tightened up. Last month it began insisting borrowers earn at least £40,000 to borrow more than 4.49 times their income — up from £30,000. And in September HSBC made the same change for those who want to borrow 4.75 times their income.
Those with smaller deposits still have plenty of deals to choose from, with the vast majority of home loans for borrowers with 15 per cent deposits untouched. This is because these rates are already higher so lenders have a bigger margin to play with.
Robert Payne, director of Langley House Mortgages, adds: ‘Lenders are now much more confident to accept self-employed applicants and those with low deposits because the impact of Covid is more measurable and predictable and they have had time to create criteria to assess individual circumstances.’
However, if the market changes first-time buyers could be harder hit because they are already paying more.
Scramble to fix
The best rates are disappearing fast. Ulster Bank is now the only lender offering a five-year deal under 1 per cent.
Yet while many of the cheapest deals have gone, average interest rates have only edged up and are still very low.
Two-year and five-year loans have only increased by 0.04 percentage points to 2.29 per cent and 2.59 per cent respectively in the past month, according to Moneyfacts.
Race against time: Brokers say they have been inundated with calls and emails from families desperate to lock into a low fixed deal
HSBC’s lowest two-year rate at 0.99 per cent is only 0.2 percentage points more expensive than the cheapest ever offered.
Brokers say they have been inundated with calls and emails from families desperate to lock into a low fixed deal. And many are now shunning two-year deals in favour of longer fixes.
Emma Jones, managing director of Alder Rose Mortgage Services, says: ‘It’s clear that people are keenly aware that rates are likely to rise pretty soon.
‘Most of the deals we are switching people to are five-year ones. Not many homeowners are interested in two-year deals at the moment.’
NatWest is offering the cheapest five-year rate at 1.13 per cent, with a £995 fee. This would fix monthly payments at £574 for a household with a £150,000 mortgage and 40 per cent deposit.
We acted quickly to bag a bargain
Early switch: Michelle Davison
Michelle Davison and her husband Gary were keen to secure a new fixed-rate deal before the cheapest rates disappeared.
The couple from Newcastle upon Tyne have a loan of around £110,000 and were paying £676 a month for their 1.64 per cent two-year fix with Nationwide.
But with the deal due to expire in February, they feared rates would be higher when they remortgaged.
After logging in to their online account, they discovered they could move their home loan three months early.
The family have switched to a 1.09 per cent two-year deal with the same lender, cutting monthly repayments to £647.
Michelle, 36, who runs a toy business, says: ‘We were so relieved that we wouldn’t have to pay the 2 per cent early repayment fee and could still lock into a cheap deal.
‘With council tax and energy bills all set to rise, we just wanted to make sure we had fixed our mortgage payments.’
However, many borrowers are looking to fix their payments for ten years or longer. Virgin Money is touting the cheapest ten-year rate at 1.95 per cent. The same household on this deal would pay £632 a month.
But those who fix for longer should bear in mind any costly early exit fees should they need to move before the term ends.
Habito offers the longest-fixed deal on the market: a 40-year home loan at 4.65 per cent or £686 a month with a £150,000 loan. There are no charges for leaving the online lender’s long-term mortgages early.
Break contract?
Around 1.5 million fixed-rate deals are set to expire next year, according to UK Finance. Homeowners should think about switching six months before their term ends because most lenders will let you reserve a deal from this point.
Nick Mendes, mortgage technical manager at broker John Charcol, says: ‘If rates were to continue to decrease between now and then, you could look at switching to a lower rate in that time with the lender. A win-win.’
Those with fixed deals more than six months away from expiring may still want to consider switching early. But for the vast majority, penalties of up to 7 per cent of the loan will wipe out any potential savings.
Dominik Lipnicki, of Your Mortgage Decisions, says he has a client considering leaving his five-year deal 20 months early.
It means he would have to pay a hefty repayment charge of 4 per cent — around £30,000 on his £750,000 loan. But he believes the security a ten-year deal can provide makes it worth it.
Mr Lipnicki says: ‘We expect to see far more people switching out of fixed deals early . . . Some will be considering early repayment charges.’
Overpay play
With savings interest rates at an all-time low, it could pay to put your spare cash into overpaying your mortgage.
With mortgage costs still cheap, more borrowers can afford to make larger monthly payments. Santander says borrowers have cleared an extra £1.3 billion of mortgage debt this year.
Overpaying just £3 a day on a £250,000 loan at 2 per cent could save £7,170 in interest over a 25-year term.
And it would shave two years and five months off the lifespan of the loan. If you could spare £10 a day (£300 a month) you could slash your interest bill by £19,133 and clear your mortgage six years and eight months earlier, according to mobile phone savings app Sprive.
Most providers allow borrowers to overpay by 10 per cent of the outstanding balance a year without penalty. Be sure to keep back cash for emergencies.
Laura Suter, head of personal finance at investment platform AJ Bell, says: ‘Over shorter periods you could well be better off overpaying on your mortgage because you’ll save on the interest you would have been charged.’
