Mortgage rates and payment shocks

Do you expect a lot of your customers to have a payment shock when their fixed rate deal expires? How are you preparing them? A lot of borrowers who took out a DIY mortgage, ie found a cheap deal online 2-5 years ago will certainly be in for a shock if they have not reviewed their deal end date and Lenders Standard Variable Rate. Clients who have a a dedicated mortgage advisor preparing them for what's to come and working with them to find the best deal going forward will not have a payment shock but be prepared with realistic expectations. This is the difference. This worries me as clients who are unprepared for a potential, hundreds of pounds increase in their mortgage payments, may find themselves in urgent financial difficulty. I urge any homeowners coming to the end of their fixed term in the next 6 months to contact a broker to review this. Dont get into debt, miss payments or default thinking there is no solution. There is usually a solution as long as you are prepared ahead of time and take advice from a qualified and experienced mortgage advisor.

I contact all my clients 6 months before their current deal ends however not all advisers do this and so my biggest advice to clients is to make sure they know the exact date their mortgage deal expires and make sure that they are speaking with their adviser in order to have a replacement deal lined up well in advance.

I expect pretty much anyone coming off of a fixed rate to have a nasty shock. Rates have pretty much trebled since the start of the year and this can mean hundreds of pounds extra in repayments. My advice is to seek advice early. You can either lock in the best possible deal now to protect yourself against what seems like further rate rises or if the new repayment is simply going to be unaffordable, make a plan to possibly even downsize to something that is. That unfortunately will be the reality for some households.

My advice would be to speak to your current lender if you're struggling. If you have sufficient equity, they might allow you to switch to interest-only for a couple of years to ease the pressure. Though that's by no means guaranteed. Otherwise, make overpayments now, so your loan-to-value is lower when you come to remortgage. It might allow you to obtain a lower mortgage rate. Ultimately, these rate hikes will probably lead to a lot of distressed sellers and lower house prices.

I feel the rate shock will be felt more by the under 35s, as that is the generation that has not experienced higher rates than we had pre-2008 financial crises. Many of this age group would have fixed at ultra-low rates over the last few years. Together with this and the increased living costs, it’s like a double hammer blow when these deals end. Generally, I feel people will start to cut back on luxury spending, such as eating out, and possibly think twice about what goods they buy and think about if they really need it. In theory, this of course should bring inflation down, but what happens to the businesses that experience less demand for their goods and services? As a Brokerage, we have been stressing clients to assess and review their current mortgage if it is coming to an end in the next six months. This has been done via our Social Media channels to get much reach as possible. Most mortgage offers are now valid for six months and certain lenders are allowing product transfers to be done five months before the current deal ends. This will allow clients to lock in a rate and be protected from any possible further rate increases later this year.

Mortgage borrowers will see an increase in their costs when they look to renew. I have a client who is coming to the end of his fixed rate at 1.19%, and the lowest rate now is 4% for a 2-year fixed rate. This is a huge increase.

Rate shock is not something we have seen in the mortgage market for quite some time. So long in fact that many home owners will never have experienced a rising interest rate environment. For those coming off the very lowest fixed rate deals at around 1%, a jump up to a 3%+ interest rate is going to have a big impact on their household budgets. For those that are not able to absorb that increase, they only have a number of potential options; the most radical is to sell and downsize, or they could potentially look at extending the repayment term (which may also require a rethink in terms of their retirement plans and what age they expect to retire). The other option is to take a long hard look at their monthly bills; do they really need Sky, Netflix, Amazon, Spotify, Apple TV (and Music?), plus Disney+? Are there any everyday luxuries in the household shop that can be stopped? It will generally be a combination of changes that will help the situation, rather than one singular silver bullet.

With the continued rise in interest rates, and lender products increasing typically faster than the base rate increases, payment shock is firmly back on the agenda. For over a decade borrowers have had potential payment shock explained to them as the possibility that at the end of their fixed rate period their mortgage payments could increase, but in reality it has been a reduction in payments for most as their loan to values have rapidly decreased with rising prices, and deals on offer have been driven down to record lows through intense market competition. The majority of borrowers now should be prepared for some level of payment shock and be preparing their personal finances for this. There will be some borrowers who will be able to amend their personal spending to reduce their outgoings and create extra disposable income to put towards the added costs. Others unfortunately may find they are going to struggle with little budget left to work with. Any mortgage that has been taken over the past few years will have been assessed as affordable at point of application at rates well above the lender’s variable rate at the time, and higher than current rates. However, there was no accounting for severe increases in cost of living, inflation at 10% and more importantly the natural changes which borrowers progress through as they become homeowners. [Such as starting a family, and increasing unsecured borrowing on things such as cars] Any mortgage borrower with a mortgage coming to an end within the next 7 months needs to be acting swiftly to assess their situation and secure an appropriate rate. Those with longer term expiry on their fixed rates will not be immediately affected, however should start to consider where their new mortgage payments will end up once their current deal expires and adjust their outgoings accordingly whilst they have time to get things in order. Where possible overpaying to reduce the debt that needs to be remortgaged is also advisable.

We are reaching out to existing clients early in the process to prepare them mentally for the higher rates. I think it is even more important to use a specialist broker for your mortgage & equity release advice going forward. We are in for an interesting time in the near future for mortgage rates, and people need to be prepared for it.

There is going to be a huge shock for those coming out of their 2y fixed rates, when many took these out they were sub 1% now these same lenders are looking closer to 4% if not higher. I have had a client to we got their offer 6 months ago at 2.1%, they have had so many delays and now we have had to re apply at 4.19% As we always say there is no reason to throw money away on the lenders SVR, speak to a broker sooner rather than later and secure a fixed deal before rates go even higher

Here are my responses: For question #1: Absolutely I expect customers to have the shock of their lives coming of their fixed rates after these historically low rates we have seen the past few years. All we can do to prepare them is educate them and make sure we have everything lined up to have that refinance in place as soon as the fixed rates ends to make sure they don’t get on the dreaded variable rate. For question #2: This is already affecting consumer behaviour, its lighting a fire under them, I have never seen consumers so motivated to send me all the required information the lenders have requested. For question #3: Speak to your broker NOW! Ask to be put on a fixed rate, tell them when it needs to complete so they have a deadline to aim for. Instruct your solicitors at mortgage application stage. Collect all of your documents and information have it ready so you can send it ahead of any applications so if a lender/ solicitor asks for it its already their with your broker to send on and speed up the process.

With all the other pressures on household income, there is no question that those who are coming off a fixed rate in the coming months are facing a bit of a double whammy when they discover the rates and associated payments any new deal is likely now to be. As an example of the benefit of so doing, those that have been fortunate enough and able to overpay consistently to reduce the overall mortgage amount during their current deal, may in monetary terms be no worse off each month but for the majority its likely that their new mortgage payments will now be a much larger chunk of their outgoings. In amongst all this and from an advice perspective, the current climate could and already has seen the definite "return of the track". This variable but typically discounted type of product is now becoming a potentially viable alternative for those clients inclined to be flexible and with a preference and desire to not tie themselves in to the current higher fixed rates for the standard 2,3 or 5 year periods. Although not providing the stability of a fixed deal, in many instances, these tracker deals - which are currently typically available at around 2-3% below the lenders standard variable rate - will offer cheaper monthly payments in the immediate term and may be suited and a consideration for those willing to take a risk and confident in managing their finances with an added degree of uncertainty. These products will - in most cases - allow the discount to be locked in for around 2 years and so unless rates were to rise a further 2% in this period, it may be that for those willing to take the risk the time may well be right for the "return of the track". With all of this in mind, for those whose deals are in the last six months or so, bespoke advice is even more critical than ever as simply automatically shifting on to the "best" fixed deal currently available may not necessarily be the "best" thing for all circumstances.