Yahoo Finance Interest rates: What to do if a remortgage is looming
About half a million fixed rate mortgages are expected to come to an end during the rest of 2023. Most of them were fixed below 2%, so homeowners are set for a bit of a financial shock.
It means that anyone with a remortgage looming needs to make plans.
The good news is that mortgage rates are falling, with a number of major lenders making cuts recently. Moneyfacts data shows that the average two-year fixed rate mortgage hit a recent peak of 6.85% at the start of August, but has since dropped back to 6.38%. The average five-year mortgage, meanwhile, is now below 6%.
This owes much to the fact that it’s starting to look like we may not need as many interest rate hikes to tame inflation as people had feared back in the summer.
Unfortunately, there’s a high likelihood that mortgage rates are still far higher than the fixed rate you’re moving from. The Financial Conduct Authority (FCA) has calculated that monthly mortgage payments could go up by £340 on average.
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And while rates may ease a little further from here, they’re unlikely to shift dramatically until the point when the market starts expecting the Bank of England to cut rates, which is likely to be well into next year.
However, you have a few options.
Switching to a variable rate
One key question will be whether you want to switch to a variable rate deal — like a tracker mortgage — or find a new fixed rate.
Variable rates are popular, because there’s every chance that mortgage rates will fall during the coming year or so, and this will be passed on quickly.
However, there are no guarantees, and if inflation proves stickier than expected and the Bank of England raises rates again, you could see your monthly payments actually rise.
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Some people will prefer to fix, on the understanding that they may well end up paying more over the fixed term than they would in a variable rate deal, but at least they have certainty that the rate won’t rise — no matter what. It will depend on how valuable certainty is for you.
Lock in your deal
You also need to decide when to lock in your deal. The FCA has told banks they should be allowing you to agree a rate up to six months’ before your current deal expires.
It may make sense to do so as early as possible. If rates fall as expected, you can just ditch that deal and shop around for a better one closer to the time. If inflation surprises on the upside, and rates stay higher, you’ll have a cheaper deal locked in.
For some people, all of this is pie-in-the-sky, because whatever kind of mortgage you opt for, and whenever you arrange it, it’s unlikely to be affordable. If that’s the case, it’s worth talking to your lender, because the FCA has issued guidance encouraging them to be more flexible with people facing a mortgage crunch.
Extend your mortgage
It may be possible to extend the term of your mortgage for a while, in order to lower the monthly payments, without going through a full affordability check.
So if you have 15 years left to run on your mortgage, you may be able to stretch it out to 20, and pay less each month — because you’re repaying less of the loan.
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However, you need to consider what you will do once your temporary extension ends. Will you be able to shrink it again and increase your payments to make up for lost time, or will you end up with a permanently longer deal? If you end up paying it for longer, it means paying more interest overall.
Move to interest-only payments
You could also consider moving to interest-only payments on a temporary basis, which the FCA has made simpler right now.
However, again, you need to work out what will happen when this arrangement comes to an end. Will you be able to increase your payments, or will you be forced to extend the mortgage term?
A longer mortgage isn’t the end of the world, but you need to consider the implications before taking the plunge.
There’s a lot to consider, but try not to be paralysed by indecision. If you leave it too late and slip onto a standard variable rate in the interim, you’ll accidentally end up with the highest possible mortgage rate at the worst possible time.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
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