Mortgage rates hurtle higher: Should you take longer fix or overpay?

Homebuyers and homeowners across the UK will be watching on with concern as mortgage rates continue to soar upwards.

Since the Bank of England’s first base rate rise on 16 December, the interest rate on the average new, two-year fixed mortgage has risen by 0.51 per cent from 2.38 per cent to 2.89 per cent, according to Moneyfacts. 

Similarly, the average five-year fixed deal has increased from 2.66 per cent to 3.04 per cent during that time.

Moving on up: Thanks to three successive quick fire base rate rises from 0.1 per cent to 0.75 per cent, mortgage lenders have been responding in kind

For equity-rich homeowners or those looking to buy with larger deposits, the difference is more pronounced.

The average two-year fixed deal for a mortgage covering 60 per cent of a property’s value has risen from 1.72 per cent to 2.39 per cent since 16 December.

On a £250,000 mortgage being repaid over 25 years this would mean paying £1,108 a month compared to £1,025 a month – a difference of £996 a year.

It is a sharp contrast to summer 2021, when buyers with 40 per cent deposits, or homeowners with 40 per cent equity built up in their property, could secure mortgage interest rates lower than 0.90 per cent.

Currently the cheapest two-year fixed deal, which is offered by Barclays, charges 1.94 per cent with a £999 product fee.

Many homeowners who fixed last year for two years at record-low rates may now be regretting their decision to not fix for longer.

The base rate is expected to rise again over the coming months, although most economists and analysts are not forecasting a move beyond 1.5 per cent this year.

The base rate determines the interest rate the Bank of England pays to banks that hold money with it, and influences the rates those banks charge people to borrow money.

Further rate rises will likely be felt across the mortgage market, which could mean that those due to remortgage later this year or next may face a financial shock when that times arrives.

This is Money looks at the different ways homeowners and landlords might manage the rise, and attempts to answer some of the common questions we are being asked.  

Should I overpay my mortgage to mitigate rises?    

One option open to those worried about increasing mortgage rates when they come to remortgage is to overpay.

Overpayments are extra payments made on top of the usual monthly mortgage commitments, which will enable borrowers to pay off their mortgage faster and save on interest overall.

The majority of fixed-rate mortgage deals allow borrowers to make overpayments amounting to 10 per cent of the total outstanding amount each year without incurring early repayment charges.

Some are more flexible, but others may be more restrictive, so borrowers should always check before making overpayments.

David Hollingworth, associate director at broker L&C Mortgages said: ‘Those concerned about where rates might be in a year could start to overpay to help reduce the debt more quickly.

‘This could help them make the most of a super low rate now and be in a better position to deal with higher rates when they refinance.’

Is it worth taking a tracker or variable rate?  

A quarter of UK mortgage borrowers are on variable, tracker, or standard variable rate mortgages.   

These rates are not fixed, and can change either in line with the base rate, or when the lender decides to raise or cut them. 

It is likely that borrowers on these rates will continue to see their repayments go up, unless they decide to fix.

However, anyone browsing mortgage rates at the moment will notice that many of the cheapest deals are on variable rates. 

For example, The West Brom Building Society currently offers a two-year variable discounted rate charging 1.09 per cent with £999 to pay in additional fees.

This is essentially a 3 per cent discount on its standard variable rate, which is 4.09 per cent.

Should you risk it? Borrowers will pay a premium for the security that fixed rates offer but variable rates leave you at the mercy of lenders and or the Bank of England.

It might seem like a good deal for now – but as mortgage borrower opting for this deal you are therefore entirely at the mercy of the lender and its standard variable rate. If it increases the standard variable rate, your rate goes up. 

A tracker is another a type of variable mortgage that essentially tracks the Bank of England base rate.  

For example, Barclays currently offers homeowners one of the cheapest two-year tracker mortgages, at 1.15 per cent rate plus the base rate (0.75 per cent).

This means that, at the moment, borrowers would be on a rate of 1.9 per cent – and it also comes with no product fees.

Whilst the Barclays tracker rate remains fixed for two years, the base rate will vary depending on the what the Bank of England decides to do. Borrowers in this situation are therefore at the mercy of the Bank of England.

If the base rate were to rise to 1.5 per cent this year, for example, anyone on this deal would see their overall rate increase from 1.9 per cent to 2.65 per cent.  

Most people prefer the certainty of fixed rates, but some will be tempted to try their luck with a cheaper variable deal. 

Hollingworth adds: ‘The important thing to consider is how you would cope with further rises in interest rates, so having enough flex to cope with higher payments is crucial. 

‘It could stretch a homeowner, so consider the worst case as well as best case scenarios which should help evaluate if a tracker is the right option.’  

Should I trade my two-year fix for a five-year?  

For the three quarters of UK mortgage borrowers who are on fixed deals, they won’t encounter any increased interest rates until they reach the end of their existing term.

For those coming up to their renewal date, many are opting to fix for longer to avoid having to confront rate rises in the near future.  

Martijn van der Heijden, chief financial officer at mortgage broker and lender, Habito, says: ‘If the Bank of England does need to raise rates several more times over the next 24 months, when homeowners do come to remortgage, we could see mortgage prices much higher than where they are now.

‘We are continuing to see people remortgaging and turning their backs on two-year deals that offer little interest rate protection.

‘Lots more customers are opting for mid-to-longer-term deals. At Habito, 57 per cent of all our remortgaging customers are now taking out five-year deals and 10-year deals are also four times more popular than they were last year. ‘ 

One thing to consider is whether you may need to move house in the next five years.

While some mortgages can be ‘ported’ to a new property of a similar value, this isn’t always the case, and there may also be fees involved.  

Weighing the cost: Landlords face a combination of higher interest rates and the loss of mortgage interest relief, meaning buy-to-let could be less lucrative

What about buy-to-let mortgages?

Buy-to-let landlords are seeing mortgage rate rises similar to those experienced by homeowners.

The average two-year fixed mortgage covering 60 per cent of a property’s value has risen from 1.98 per cent to 2.63 per cent since 16 December, according to Moneyfacts.

For a landlord with a £250,000 interest-only mortgage, that means paying £548 a month rather than £413 a month – a difference of £1,620 over the course of a year.

Landlords who own properties under their personal name can no longer claim full tax relief against their mortgage costs, meaning this will be all the more painful.

For landlords looking for a mortgage covering 75 per cent of a property’s value, the base rate impact has been less severe.

The average two-year deal now costs 3.20 per cent compared to 2.91 per cent back in mid December last year.

Any landlords and budding investors keeping a keen eye on the cheapest possible deals will also have noticed some significant hikes. 

Just three weeks ago, the lowest possible rate for a two-year fixed deal for a buy-to-let mortgage covering 60 per cent of the property’s value was 1.09 per cent.

This was offered by The Mortgage Works, and came with a hefty £4,239 in fees.

Today, the lowest two-year fixed buy-to-let mortgage rate on the market is still offered by the Mortgage Works, but now it is charging 1.59 per cent – albeit with slightly lower fees of £3,540.

With the fees added, that’s the difference between paying £336 a month on a £250,000 mortgage and £451 a month.

Of course the best rate may not necessarily be the cheapest mortgage overall when fees are taken into account so it’s never advisable to judge a mortgage purely based on the interest rate.

For example, for someone currently looking to purchase a £300,000 buy-to-let using a £160,000 mortgage, the cheapest overall deal is offered by Leeds Building Society. 

Its interest rate might be 2.01 per cent, but an investor will only face £749 in fees which they can either add to the mortgage or pay upfront.

The annual cost for an investor opting for a £160,000 interest-only mortgage would be £3,591 with Leeds Building Society, as opposed to £4,314 if they had chosen the 1.59 per cent deal by The Mortgage Works.

Compare the true cost of rates and fees using This is Money’s calculator 

Plan ahead: Ensuring you are ready to lock in your next deal ahead of your current deal expiring may save you from paying a higher rate were you to leave it to the last minute

Whatever you decide, it’s vital to plan ahead 

For homeowners or landlords approaching the end of their existing fixed deal, it is vital they plan ahead and lock in a new mortgage offer at the earliest opportunity.

Many borrowers don’t realise they can often apply up to six months before their current deal ends to secure a new one and lock in the rate.

This is because mortgage offers are typically valid for three to six months.

Van der Heijden adds: ‘For homeowners with mortgage deals expiring in the next six months, it’s the ideal time to look at whether fixing their mortgage costs and protecting themselves against further household bill volatility, is the right course of action.

‘If you haven’t got a mortgage offer secured yet, we’d recommend getting your documents in order, checking your ID is up to date, and your address is correct on your bank statements so that you can avoid these common pitfalls when it’s time to submit your mortgage application.

‘The cheapest deals on the market are being withdrawn by lenders at short notice, so an inconsistency in your documents or delay in considering a mortgage recommendation, could see you miss out on the most competitive rates.’

This post first appeared on Dailymail.co.uk