MILLIONS of households face £3,000 a year bill hikes as interest rates are set to rise again this week.
Four million mortgage holders are set to see their monthly payments jump by the end of the next year, the Bank of England has warned.
1
People with fixed-rate mortgage deals due to expire at the end of 2023 face £250 a month bill hikes when they are forced to refinance onto a higher rate.
This figure is based on market interest rates at the end of November, with the Bank of England base rate set at 3%.
But the Bank is poised to raise interest rates by 50 basis points to 3.5% on Thursday.
The move will make the cost of borrowing, including loans, credit cards and mortgage repayments more expensive.
This could mean that average mortgage costs surge by £3,000 a year for many households who are already seeing their finances stretched by soaring prices across the board.
But the exact amount that your mortgage repayment will rise by will depend on the size of the mortgage, the rate you fixed at and the loan-to-value when you remortgage.
It comes as the risk of households defaulting on debt has risen, the Bank of England has warned.
High-street banks use the Bank’s base rate to work out the interest rates it offers to customers.
Most read in Money
The Bank is hiking interest rates in an effort to tackle rocketing inflation.
But the move is pushing up borrowing costs, including on mortgages, though savers may get better rates on their nest egg.
The UK’s rate of inflation hit a 41-year high of 11.1% in October and was driven by soaring gas and electricity prices.
Inflation is a measure of how the price of goods and services has changed over the past year.
When it goes up it means prices on everyday items, essentials, fuel and bills are higher – which means budgets are being squeezed.
That Bank has raised interest rates eight consecutive times since December 2021.
And millions of mortgage holders that took out a fixed deal beforehand are paying extremely low rates of around 2%, according to MoneyFacts.
When these homeowners come to remortgage, they will face a shock with higher repayments as they’ll be forced to take out fixed deals with much higher rates.
Martin Lewis previously warned that millions of homeowners face a “huge payment shock” in the Spring.
But mortgage rates have fallen back below 6% for the first time in two months according to MoneyFacts.
The average two-year fixed deal is 5.84% and the average five-year deal sits at 5.67%.
A new forecast on how much interest rates will rise next year on Thursday could possibly bring some relief to mortgage bills.
At its last interest rate meeting in November, the Bank warned that interest rates would hit a maximum of 4.6% next year.
If this forecast is revised to a lower level it may open the way for some lenders to reduce their mortgage rates.
Last month, several lenders began cutting the rates on their standard variable and fixed-deal mortgages in response to the revised forecast announced by the Bank.
The increased pressure on households is not expected to challenge the resilience of UK banks which will be well-equipped to support lending, the Bank’s Financial Policy Committee (FPC) said.
This is because big banks and building societies have strong balance sheets, higher profits, and have increased their provisions to support credit losses, it said.
The FPC said in its financial stability report: “Major UK banks’ and building societies’ capital and liquidity positions remain strong.
“They are therefore well placed to absorb shocks and continue meeting the credit needs of households and businesses.”
Furthermore, the FPC judged that households are more resilient now than in the run-up to the financial crisis in 2007 and the recession in the early 1990s.
“Nevertheless, many households will find it challenging to manage higher interest rates alongside the ongoing rises in the cost of essentials, and pressure on UK households will increase,” the FPC added.
“As household debt-servicing burdens continue to rise over the next year, arrears and defaults are likely to rise.”
If you’re looking for a new mortgage deal we’ve explained how best to go about this below.
How to choose the best mortgage deal?
There are lots of factors to consider when searching for the best mortgage deals.
The amount you can borrow and interest rate are important factors but you should also consider the type of mortgage.
Do you want the certainty of a fixed-rate mortgage or the flexibility of a tracker that could get cheaper rates and doesn’t have exit fees?
There are mortgage calculators online that will let you compare the monthly cost of a mortgage based on the interest rate and any fees.
A lender or mortgage broker will be able to offer advice on the best type of mortgage deal to meet your needs.
Shop around for the best mortgage deals rather than opting for the first bank you see.
Remember a bank or building society will only offer its own options which limits your choice.
You can also use a comparison website to find deals across the market based on your level of deposit and whether you want a fixed or variable rate.
A comparison website will usually let you search for all types of home loans such as for first-time buyers or the best buy-to-let mortgage deals.
This will give you an indication of what is on offer but you will need to do the application yourself.
Some lenders may not be on comparison websites so it is worth searching directly online as well.
Alternatively, a mortgage broker can help search the market more widely and find the most suitable deals for you.
Is it better to get a mortgage from a bank or a broker?
A bank may offer the best mortgage deal for you but shop around before you commit.
This is because a bank adviser will only offer their own products.
Limiting yourself to one bank’s products could mean you end up paying more than you needed to or you may not even meet their criteria.
Alternatively, a broker can use their market knowledge to help decide which type of mortgage and lender is best for you.
This could be of benefit if you are self-employed or have a poor credit rating as they may have more experience dealing with these sorts of applications.
It saves time on doing multiple applications, as you just tell your broker your income and expenses and they will work out the best mortgage you can get.
They can usually help with your application and will fight your corner to get you approved.
A broker will be able to advise on a range of products from different lenders, but these may also be limited to a panel so you should check if they are tied or work across the whole market.
There may, however, be extra fees when using a broker.
A mortgage may have an application or product fee but a bank adviser won’t charge anything on top of that.
In contrast, a mortgage broker may have their own fees for their advice.
When should I start looking for a new mortgage deal?
Getting your mortgage prepared when buying your first home can make you more attractive to sellers as they can see you have finance in place and are serious about proceeding with a purchase.
It can take a couple of hours or a few days in more complicated cases to get a mortgage in principle.
This gives you an idea of how much you can borrow, and you can usually get a decision within hours or a few days in more complicated cases.
You can do a full application once you have had an offer on a property accepted.
It can take four to six weeks for a mortgage to be approved depending on how much information a lender needs.
A seller will usually wait, once they have accepted your offer, for you to get your mortgage sorted.
But having an idea of what you can borrow in advance will speed up your purchase and ensure you don’t miss out on your dream home.
More preparation is needed if you are remortgaging.
A lender will move you onto a more pricey SVR once your mortgage deal comes to an end.
That means you could have been on one of the best mortgage deals and suddenly your monthly repayments will increase.
You should start looking for a new mortgage at least three months before your deal ends.
It can take at least two months for a remortgage to complete so you need to allow time to find a new deal and make the application.
Mortgage offers typically last up to six months, so you could start early if you spot a good rate and time the start date so you avoid any exit fees and move smoothly onto the new rate once your deal expires.
