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Managing mortgage rates and rate rises

ended 04. October 2022

A journalist at iNews.co.uk is writing a piece on what people can do to manage their mortgage costs, e.g. going interest-only, extending the term, potentially even paying an ERC to lock into a rate before they rise further. He's also keen to know how high mortgage rates will go next year, if the base rate is hiked to 5.5pc and beyond? Just a few lines will do, and deadline is tight.

10 responses from the Newspage community

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David Robinson
Co-Founder at Wildcat Law
Unfortunately, the majority of options available to borrowers are only useful for short term financial hardship. Payment holidays allow the borrower to cease payments for a short period of time but ultimately result in the borrower paying more overall as the interest that they have not paid during the "holiday" will also attract interest. Switching to interest-only can dramatically decrease monthly outgoings but borrowers still have the problem of how they will repay the debt at the end of the mortgage term. They will also pay more over the life of the mortgage as the capital amount is attracting interest for the life of the mortgage rather than reducing. It is vital to have a credible repayment strategy regarding how you will do that. If you are unable to pay your bills and mortgage now, what will change in the future? If you are reliant on interest rates falling, again you probably have a large problem. In many circumstances, extending the mortgage term may be a solution. Again you pay more over the life of the mortgage as you are borrowing for longer, but your monthly payments will be lower than on a longer term. The main issue is having enough years before retirement. Once a mortgage term passes the age you would normally retire at you need to be able to explain how you will be able to maintain the mortgage payments. As most of us will take an income cut in retirement, this is not always easy to do. The other option is to downsize, not likely to be a popular choice but ultimately may be a necessary one.
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Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
If you are coming to the end of a fixed rate soon, your options are stark. If you are lucky enough to have some savings, you could use these to build up the equity in you home to get a lower rate. You could also lock into a mortgage offer up to six months before the end of your current rate. This could protect against further rate rises over the next six months. If you can afford the new rates, you may want to opt for a longer fixed rate as some of these deals are cheaper that a more common 2-year fixed rate product. If you are struggling with your mortgage, speak to your lender. They may help by offering a period of interest-only payments. I expect to see the Bank of England base rate hit 5% next year and no more. A flailing economy will control inflation itself and the Bank will have no cause to raise the main rate and damage it further. By the end of 2023 we will probably have rates akin to where they are now.
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Craig Fish
Director at Lodestone Mortgages
There are several options available to people looking to manage their mortgage costs. If you are struggling with rising costs, it's always important to address things quickly and speak with a broker who will give you a whole of market and unbiased appraisal of your own personal circumstances. One option could be to extend your mortgage term. This will have the effect of reducing your monthly payments, but don't forget you will pay more interest. If you are suffering from some short-term affordability issues, asking your existing lender if you can switch to interest-only is also an option. Many clients panic that they need to switch mortgage rates now to avoid any further rate increases and lock in early. In some cases, this can involve paying an early redemption charge. We would say that, if possible, you should avoid this but depending on the amounts involved it may be worth doing. You should ask your broker to carry out a full cost analysis for you to determine if paying an early redemption charge is a cost-effective exercise. Looking at rates going into next year is a very difficult one to answer. If only we had a crystal ball. The latest news suggests that the base rate may not rise above 5.25%, and if that's the case then we suspect that lenders may not increase their rates too much more, as many have already priced in the expected increase to 6% and above. This, though, is an issue that is really difficult to judge, and one that we brokers are challenged with daily.
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Imran Hussain
Director at Harmony Financial Services
The best thing anyone can do right now it to seek advice from a professional everyone's situation is different. With affordability models changing constantly, we are seeing many borrowers opt for slightly longer terms on their mortgages compared to the old norms of just 25 years. This brings down the monthly payment and leaves people with some money to enjoy what else life has to offer. The problem, of course, is that in the long term it results in more interest being paid.
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Riz Malik
Independent Financial Adviser at R3 Wealth
I do not think that there is a magic pill to swallow here to reduce monthly mortgage payments other than seeking professional advice reagarding your own circumstances. I think we need product innovation from the lenders and a review of mortgage regulation in light of recent market conditions, and we need it fast.
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Gaurav Shukla
Managing Director at Home Me Mortgages
If your fixed rate is coming to an end within 6 months from now, it’s time to act quick. You can secure a rate now before they rise more, and will start once your current rate comes to an end, potentially saving you money if you were to secure a rate nearer the end date instead. I’ve spoken to some customers where their mortgage balances are high and are coming off a 2% fixed rate and will now need to move to a 5% fixed rate. This will increase their monthly payments by a huge sum of £750. Some customers are also contacting us to come out their deals early by paying an early repayment charge, as they fear the rates will be much higher than now when their current rates expire. Interest only was pretty dominant before the crash on 2007-08 but took a back seat after this due to the new criteria and restrictions. However, there is more talk of converting the mortgage from repayment to interest only, or even part & part, for the short term to help with monthly outgoings. There are downsides to an interest only mortgage being the balance doesn’t reduce, but the fear of not being able to live month to month has overtaken this. Moving to an interest only mortgage isn’t as simple as the customers would need to meet the restricted lender criteria. Extending the term of the mortgage can help with the monthly payments but does increase the overall interest paid throughout the term. Typically lenders allow the mortgage term to go up the eldest clients 70th birthday, with some going up to the age of 75, so if this is an option, it’s worth exploring with your mortgage broker. The current Bank of England base rate is sitting at 2.25% with strong rumours that this will increase again in November, at the next sitting. The main high street lenders rate start from 4.5%+. If we see the base rate increase to 5.5% next year, we will most likely see lenders rates starting from 7%+
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Jonathan Burridge
Founding Adviser at We Are Money
It is expensive to move product now and borrowers should try not to panic. Paying an existing fixed rate ahead of its end date will most likely incur early settlement charges and the new rate will be higher. It is possible to work out what the cost of doing this will be during the time remaining on the current rate, but, beyond that is anyone's guess. We have shown several clients that repaying and moving lender early will cost them around £10,000 and they would need to recover at least that amount to make the move beneficial. Moving to interest-only is made difficult because of mortgage regulations and also whether that is beneficial to the borrower in the longer term. For some, with a suitable repayment strategy, it might be an option. Extending the mortgage term will reduce the costs, but the loan will be assessed by the lender for affordability and these assessments are likely to be changing.
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Mark Robinson
Managing Director at Albion Forest Mortgages
Switching to an interest-only mortgage may be the simple option for many, however you have to pay that mortgage back somehow and an interest-only mortgage may not be an option for the majority. Extending the term of your mortgage can lower your monthly payments, but you will ultimately pay more in interest over the term and the saving can often be minimal. My recommendation would be to speak to an independent mortgage adviser, as they should be able to present you with a range of options and the best course of action for you. It has never been more important to use a professional.
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Ricky Dosanjh
Director at Reeds Financial
Extending the term if possible is a great way to help manage mortgage costs, then when you come to remortgage, you can reduce the term back down. The short-term cost is you will pay more interest. If your fixed rate is set to end within the next six months then you can lock into a new rate with a lender as many mortgage offers are valid for 6 months. If your deal isn't ending anytime soon then paying an ERC may beat any future rate rises with the base rate being predicted at 6% in the not-too-distant future, meaning a borrower's mortgage rate could start from around 7.5-8%+. Everyone's financial circumstances are different so speak to a professional to see what solutions would work for you.
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Ashley Thomas
Director at Magni Finance
I would review your mortgage if it is due to expire within the next year to see what the best option. If base rate goes to 5.5% and if mortgage rates increase in line with this, it would be unaffordable for a lot of people. I can’t see rates sustaining for long at much higher levels.