Yahoo Finance Everything you need to know about remortgaging in 2023
Having calmed down slightly, the mortgage market is still in a volatile state, and average rates for fixed-term deals are still on the rise.
This is largely down to the issue of stubbornly-high “core inflation” figures, which first surfaced in April and increased in May. It’s been falling since June, most recently to 6.8pc in July, but it’s not yet clear whether that will have a calming influence on mortgage lenders, as the Bank of England announced a further increase to the Bank Rate today.
Around 2.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2023 and 2024, with many being forced to refinance at rates that are double what they are used to.
The average two-year fixed mortgage is now 6.79pc, according to data company Moneyfacts, a huge jump for those who’d taken out a two-year deal in 2021, when average rates were well below 3pc.
Where are mortgage rates now?
The average two-year fixed rate is currently 6.79pc; the average five-year fix is priced slightly cheaper at 6.28pc, according to analyst Moneyfacts.
Two-year averages are now above the 6.65pc peaks seen in November 2022, following Liz Truss’s mini-Budget.
Will mortgage rates rise if the Bank Rate increases again?
The Bank of England has made 14 consecutive raises to its central interest rate, known as the Bank Rate, since December 2021 – most recently increasing it to 5.25pc in August.
Throughout the last year lenders passed on the majority of Bank Rate increases to mortgage customers as its own borrowing costs rose. But it is not the only factor which dictates pricing for fixed-rate rates, and lenders also take into account other market factors such as swap rates, which began falling a couple of weeks ago.
While the recent mortgage rate increases were a result of so-called core inflation, which rose to 7.1pc in May, this has since fallen to 6.9pc in June. Levels are still high, but could indicate the Bank Rate’s peak could be lower than recent estimates, and we have recently seen some major lenders reduce mortgage rates.
Where can I find the cheapest interest rates?
According to Moneyfacts, the cheapest two-year fix for a borrower remortgaging can be found with MPowered Mortgages at a rate of 5.66pc. Borrowers will need a 40pc deposit and must pay a £2,495 fee.
The best five-year fix for a borrower remortgaging is with Virgin Money at a rate of 5.23pc, with a £1,295 fee. Borrowers will need at least a 35pc deposit.
It is important to remember that the lowest interest rates do not necessarily equate to the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
Adrian Anderson, of broker Anderson Harris, said: “Don’t just look at the headline rate. Consider the overall cost of the deal, including any fees and whether the lender will pay for a mortgage valuation and legal conveyance, which most banks do.”
If you are locking in for longer than two years then be sure to check any repayment penalties which would apply should your circumstances change and you need to exit the deal early – these can run into the thousands of pounds.
How long should I lock in a rate for?
More than 1.4 million borrowers will pay higher rates this year as their fixed deal comes to an end, according to figures published by the Office for National Statistics.
This is because while fixed rates may be falling, the cost of borrowing is still inflated when compared with mortgages which were locked in two or five years ago. Borrowers coming off those deals and searching for a new rate are very likely to face higher rates.
Brokers are suggesting a typical borrower should fix for two years – this would minimise the amount of time spent fixed on an inflated rate. Mortgage rates are predicted to have fallen by 2025, when they’ll be able to make the most of cheaper repayments. However, the market has proved to be unpredictable, and how long each household fixes will depend on their individual financial circumstances.
How can I get the best rate for my mortgage?
Borrowers who put more equity into a property make themselves less risky customers, increasing the chances a lender will be happier to offer them lower interest rates.
Banks use the term “loan-to-value ratio” (LTV) to label how much they lend a borrower against a home. For example a £160,000 mortgage on a £200,000 home would be a loan-to-value of 80pc.
A lower loan-to-value and bigger deposit will unlock lower interest rates. Mr Anderson said: “It can make quite a big difference to the amount of interest you pay over the term of the deal.
“So if you have cash available you may want to consider paying down part of the mortgage to access a better rate.”
Our mortgage overpayment calculator can help you weigh up whether you’re better off overpaying your mortgage, or putting your extra cash into a savings account.
Households with a significant cash pile could also access lower rates by using an offset mortgage. A handful of banks allow borrowers to reduce the cost of their loan using cash held in an account with the same lender.
For example, a customer borrowing a £500,000 mortgage and with £200,000 in savings would only pay interest on £300,000 of the loan, but will forfeit any interest on the cash pot.
Based on a mortgage interest rate of 4.5pc, this would reduce monthly interest from £1,873 a month to £1,124 – a saving of £749 each month.
Mr Anderson said: “Offset mortgages are proving especially popular as tax thresholds are shrinking and reducing households’ personal allowance.
“There should be no tax to pay on savings used to offset the mortgage balance and you should not be paying interest on the mortgage balance offset by the cash funds. The account should also be instant access so you still have access to liquidity if circumstances change.”
Borrowers opting for a more specialist mortgage, such as an offset deal, should consult a mortgage adviser. The market is changing rapidly and with savings rates also on the rise, independent advice could save a lot of money.
What about interest-only mortgages?
Any homeowners struggling to pay their mortgage bills are able to switch to interest-only deals without a formal repayment plan. City watchdog, the Financial Conduct Authority, announced the change last year in a bid to help lenders provide mortgage forbearance at scale.
However, once the temporary interest-free period is over, homeowners must make up their repayments. To switch to a permanent interest-only deal, you’ll still need a credible repayment plan.
This article is kept up-to-date with the latest information.
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