RNew mortgage rates continued to rise this week as the fallout from the mini-budget continued to reverberate through the housing market. The higher rates on offer are bad news for first-time homebuyers and those looking to remortgage, who face much higher monthly payments. So how bad are things and what can you do?
And that has been happening this week?
Most of the mortgage lenders who effectively closed the doors after the financial turbulence caused by the September 23 mini-budget have re-entered the market. For example, NatWest relaunched deals on Monday, Barclays on Tuesday and Halifax on Wednesday.
But while there were hopes in some quarters that the government-imposed 45 pence rate on Monday, and the slightly calmer market conditions that followed, might translate into slightly cheaper new fixed-rate mortgage deals, this has not happened yet. . In fact, this week the new mortgage products continued to get even more expensive. The new two-year average fixed rate, which was 4.74% on the day of the mini-budget, was 5.75% on Monday, after 6.07% on Wednesday and 6.11% on Thursday, according to the firm. of data. money facts. It was a similar story with five-year deals, with the average rate on Thursday at 6.02%.
But you can get better rates than those averages. At the time of writing, Halifax was offering new two-year deals for those remortgaging from 5.06%, with rates on five-year deals starting at 4.46%, so that’s quite a bit lower. However, deals come and go at a remarkable speed right now.
The rise in average mortgage rates may partly reflect the fact that the government’s U-turn only happened on Monday, so from an optimistic perspective, lenders will need some time to respond adequately. They are under pressure to cut rates on their new products after Foreign Minister Kwasi Kwarteng met with banks on Thursday, and if financial markets continue to stabilize, that will obviously help.
Some brokers have forecast that lenders will start to cut rates over the next week or fortnight, assuming markets remain relatively stable.
How monthly costs skyrocket
Take the example of someone who, in October 2020, signed a two-year fixed rate offer priced at 1.59% (a pretty good rate at the time). It’s a £200,000 25-year repayment mortgage. They have been paying £808 a month. Let’s say they are now re-mortgaged with Halifax’s two year 5.06% solution (we now assume £190,000 and 23 years to go but everyone’s situation will be different). His new payment would be £1,166, an additional £358 per month. They would actually be better off financially taking Halifax’s new five-year fix, which is slightly cheaper at 4.46%, as the new payment would then be £1,102.
What is the best advice?
For those who will need to remortgage at some point, clearly a lot depends on when your current agreement ends. It is estimated that around 300,000 borrowers exit a fixed rate agreement every three months.
However, many who are concerned about the current situation have offers that may not expire for another year or more.
Mortgage broker Private Finance says it’s encouraging those with a fixed rate with a term of 18 months or less “to get in touch and consider your remortgage options now.” Discussing your options with a broker is definitely a good idea at this point.
The obvious problem is that we do not know if mortgages are going to become more expensive or cheaper in the coming months.
Some people may wonder if they can drop their current deal early and get another one now, before prices go even higher. However, most fixed rate products have Early Refund Charges (ERC) for the initial fixed period, which will sometimes be in the thousands of pounds. Plus, of course, you’ll drop a low rate early and move on to something more expensive.
The good news is that many mortgage offers from lenders are good for up to six months.
So one option is that homeowners whose existing offers still have a way to go, but who are worried, could hedge their bets by booking an offer now and wait to see how things pan out. If home loan rates have dropped, you are not committed to the mortgage offer. If rates have skyrocketed even higher, at that point you can do the math to see how much money you’d have to pay to cancel your current offer sooner than you could theoretically save if you signed up for the offer instead of paying a higher rate. . But that is not an easy business.
David Hollingworth in the L&C Corridor mortgages says that instead of accumulating cash to pay for an ERC, you’re better off using that money to try to reduce your current mortgage debt.
He adds that if you have a low interest rate and you have the funds, you could start putting some money away in a savings account now, ready for when your monthly bill goes up — the savings rates are much better than they were. – or, alternatively, you could overpay your mortgage, although there will be limits on how much you can pay.
Clearly, borrowers also have the option of moving to something like a follow-on agreement, but with multiple base rate hikes predicted to come, any head start could quickly evaporate.
For first-time borrowers, it’s clearly a very challenging time. Much depends on whether and how much house prices fall. This week there were warnings from some brokers that 95% mortgages with low deposits could be the next victim of financial uncertainty due to the risk of buyers ending up with negative equity. Some fear that the number of deals could be reduced; others that could disappear completely for a while, as happened during the first months of the coronavirus pandemic in 2020.
Are lenders withdrawing offers?
Chris Sykes of Private Finance says: “There is no need to panic about the current situation with regard to cases where an offer has been accepted, as long as the mortgage application is current. There has been a lot in the press about lenders making offers; however, this is not the case for normal residential transactions, which will be the vast majority.
“There have been very few examples of lenders extracting rates for clients after application. The only examples of this are unregulated trading and BTL. [buy-to-let] loan situations.
What else can I do?
In these challenging conditions, with everyone a little on edge, one of the key things for mortgage applicants, especially first-time buyers, is to make sure their credit history and finances are in the best possible shape.
Ideally, get a copy of your credit file from one or all of the credit reference agencies (the top three being Equifax, Experian, and TransUnion) before you apply, review it carefully, and, if possible, take any necessary action. Pay off outstanding debts and see what you can cut from your expenses.
“Borrowers need to be careful in tough times, as something as small as getting a CCJ [county court judgment] refusing to pay a £60 parking fine, or failing to pay utility bills after moving out of a property, can affect the lenders available to the borrower and affect their interest rates if they are recent and have little other presence credit,” says Sykes.