It’s no secret that there have been many changes in the mortgage industry recently, with the vast majority of homeowners being affected in some way. The knock-on effect that dramatic increases in the Bank of England’s base rate will have on your mortgage repayments depends on the type of deal you’re currently on.
Despite lots of scaremongering in the press, however, there are options available to most mortgage holders, so long as you stay informed. Below we’ll look at how the different types of mortgage rates have and/or will be affected by rising interest, and what you can do to help stop your payments from escalating beyond affordability.
How have different mortgage types been affected?
Tracker Rate mortgages
Tracker rate mortgages are a variable rate product directly linked to an external indicator, which is almost exclusively the Bank of England’s base rate nowadays. This means that the majority of people on a tracker rate will almost certainly have seen at least one rise in their interest rates in 2022, if not more.
When you take out a tracker rate deal, you will typically be offered a competitive initial rate, and you won’t usually be able to leave that deal until the introductory period ends unless you pay a fee to do so. Introductory periods are typically two-three years, however, some are longer than this.
Discount Rate mortgages
Discount rate mortgages are another form of variable rate deal, which are offered at a percentage discount on the lender’s SVR (see below). Like trackers, they have a cheaper introductory period that you’re bound to, and would typically need to pay a fee to leave before it ends.
The big difference here is that discount rates are not directly linked to an external indicator. The lender will certainly monitor fluctuations in the Bank of England’s base rate, but they ultimately decide when and how much they increase or decrease the rates, as a discount rate is based upon the SVR that they have set themselves.
For example: if the lender’s SVR is 5%, they might offer their discount rate at -1.5% of that, meaning that the initial rate you pay would be 3.5%. Should they change their SVR, your discount of -1.5% remains the same. This means that if the SVR rose to 5.5%, your interest rate would become 4%.
Discount rate mortgage holders may or may not have seen their rates rise, as lenders are less predictive than the Bank of England changes. Some people on this type of deal may have seen multiple changes to their rates and others may still have significant changes to come.
Standard Variable Rates (SVR) mortgages
Not many new borrowers opt for the lender’s standard variable rate (SVR), as this is typically higher than their other deals; however, each lender has this rate available. An SVR is set directly by the lender and acts as the default interest rate for each mortgage provider.
As per discount rate holders, people on their lender’s SVR may or may not have seen changes to their interest rates recently, but it’s almost certain that they will do before the end of the year.
If you are on any type of variable rate deal with an introductory period, such as those described above, or a fixed-rate mortgage, and they come to an end, the lender’s SVR is where you will automatically be transferred if you decide not to switch deals. There are certain benefits to being on an SVR, depending on your circumstances, despite it often being the most expensive rate available.
For example, there are no fixed periods attached to this type of interest rate, which means that if you’re on an SVR you can choose to remortgage or switch deals with the same lender (product transfer) whenever you want to, and with no early repayment fees. You also typically have the option to overpay your mortgage.
Fixed-rate deals have been the preferred option for many borrowers for some time, as they do exactly as you would expect. The interest rate you are offered at the beginning of the deal cannot change during the fixed-rate period, meaning your payments won’t increase unless your deal comes to an end.
In the current market, fixed-rate deals, for the most part, are not much more attractive than SVRs, however, they do offer the added peace of mind that your interest rate won’t increase for a defined period, which many people take comfort in, especially those on a fixed income.
What are my options?
If you’re concerned about the rising interest rates and are looking to lock in a competitive deal then it’s important to weigh up your options and keep your current circumstances in mind. For people with substantial time left on their current mortgage deal, the early repayment charges that they would need to pay in order to leave a deal before it ends may mean that they would be better off staying put for the time being.
In the current market, however, this is not as straightforward as it once was; as it will depend on the interest rates that are likely to be available to you once you are free to switch mortgages without paying a fee. A mortgage broker will be able to help you weigh up your options and their expert knowledge and recommendations will provide peace of mind that you’re making the best decision for you.
When can you set up a remortgage or rate switch?
If you’re already on your lender’s SVR you can change mortgages straight away, but if you’re locked into a deal due to early repayment charges, it may be best to wait until you are closer to the end of the term before you consider a change.
Most mortgage lenders will allow you to set up a new mortgage deal around three to six months before your current deal ends. This means you avoid falling onto your current lender’s SVR at the end of your current deal, as you would automatically transfer onto the new deal you’ve chosen.
The other benefit of choosing a deal six months ahead of time is that you are not locked into that deal until it begins. This means that you can lock in a competitive rate now, which may not be available in six months’ time. If a more attractive deal becomes available within that time frame, however, you can still opt for that one instead.
To make the best use of this valuable six-month period before your current deal ends, be sure to reach out to a broker around seven months prior to the end of your deal so that they can begin looking for the best deals available to you.
Remortgaging vs. Product transfer
If you’re looking to switch mortgages, there are two options available to you. You can opt to stay with your existing lender, but change to another of their deals, which is known as a product transfer or rate switch.
The other option is to remortgage with a completely different lender. This means that rather than being able to choose from one of the handful of deals that may be available from your existing lender, you have thousands of deals to choose from across the whole mortgage market.
Whether you should go for a product transfer or remortgage will ultimately depend on your circumstances, but we’ve compared the two below to help you decide which option might be more suited:
|New lender: Will need to reassess your income and carry out credit checks during the application process
|Existing lender: Will not need to reassess your income or credit status unless you wish to borrow more money
|Fees are payable: These vary from lender to lender, although most will include an arrangement fee, valuation fee, and legal fees, similarly to your initial mortgage application
|No fees payable: You won’t usually need to pay a fee to switch deals with your existing lender, even if you do so before your current deal ends
|Lots of choices: You can look at the full market, with thousands of deals available, giving you the opportunity to find the best interest rate and terms for your needs
|Limited choice: If you opt to stay with your existing lender there will only be a handful of deals available to you, and none of them will necessarily be any more competitive than your existing rate
|Takes a little longer: This is essentially a new mortgage application with a different lender, so the process will be similar to a full mortgage application and may take 8-10 weeks
|Quick to arrange: A product transfer can usually be set up very quickly, as the process has fewer steps
What type of remortgage should I go for?
When you remortgage, you don’t need to choose the same type of deal as you’ve had before. If you’d prefer to change from a fixed-rate to a variable rate, a repayment to an interest-only, or even try something more flexible, such as an offset mortgage, you can do so. It’s best to take advice about which type of deal is most suited to your circumstances, however, the main benefits of each type are:
Whilst not always the cheapest rates available, fixed-rates give you confidence that your payments will not go up for a specific length of time, which can make it much easier to budget.
There is a choice of deal lengths available, with the most popular options being two, three and five years, but an increasing number of longer deals have hit the market in recent years. You won’t usually be able to leave fixed-rate deal without paying substantial early repayment charges.
Variable rate options such as tracker and discount deals are popular at the moment, as the introductory period rates available for this type of deal are currently significantly lower than on fixed-term products. It’s important to remember, however, that variable rate deals can increase at any time.
Should I try interest only?
In the current economic climate, there are very few people who will be able to remortgage at the end of their current deal and find a rate that’s cheaper than their last one, as mortgage rates have risen fairly sharply across the board 2022.
For some people, especially those who were using their maximum affordability to pay for their mortgage, or perhaps have had a decline in financial circumstances, their mortgage repayments will still be difficult to afford, even if they secure the most competitive deal available at this time.
Some people are looking at switching to interest-only repayments in order to reduce their mortgage payments in light of this. Interest-only mortgages are just that, your monthly payments cover just the interest accrued on your borrowing, rather than the amount you have borrowed. This means that monthly payments will be significantly less.
As none of the capital is repaid, this means that your mortgage balance will not reduce whilst you have an interest-only mortgage, and you will still owe the same amount as you do now at the end of your mortgage term. This is why this type of repayment is typically reserved for buy-to-let investment properties, as landlords can sell their property at the end of the mortgage term to repay the balance.
If you’re struggling with your mortgage repayments, this may be something to look at as a temporary measure, but it’s important to understand that lenders will be looking for a robust repayment plan, such as an investment or savings, to prove your ability to pay off the capital at the end of the loan.
It’s sometimes possible to find a part repayment, part interest-only deal, sometimes known as a part and part mortgage, however, these are fairly uncommon. This is a reasonable middle ground, however, and may be helpful for people in certain circumstances. Make sure to discuss this option with your broker if you feel that interest-only repayments would benefit you.
Can I change the term length of my current mortgage?
Another way to lower your monthly repayments without switching to interest only can be to extend the term of your existing mortgage. Whether you’re able to do this or not will depend on the length of your current mortgage, your age, and your financial circumstances, however, it can be helpful for those whose repayments have shot up beyond and affordability.
Remember that increasing the length of your mortgage will mean that you pay more interest overall, as you’ll be charged for a longer period of time. It may also mean that you need to provide details of your pension or other post-employment arrangements, should you extend your mortgage past retirement age.
Remortgaging to extend your borrowing
If you’re looking to borrow money to consolidate debts or carry out home improvements, it may be possible to do this when you remortgage, by extending your borrowing. Most lenders will consider any legal purpose for the additional borrowing, however, this will depend on your circumstances, and you will have to meet the affordability requirements for the larger loan.
What about if I’m locked into a deal?
If you’re locked into a deal with high early repayment charges, but are looking to borrow more money now, you may be able to get further advances from your existing lender, although this can sometimes mean that they will increase the interest rate.
How to choose the best mortgage deal for me
Switching your mortgage, whether that’s to a new product with your existing lender, or remortgaging to a new lender and deal entirely, has always been a big decision. Which deal is most suited to you will always depend on your specific circumstances, and there is no ‘one size fits all’ approach to mortgages.
When you throw in the turmoil that the mortgage market is currently experiencing, it can be incredibly daunting to know which way to turn for the best. Available deals change rapidly, and with another potential Bank of England base rate rise expected in the near future, many people won’t know whether to move now or hold fire.
Seeking advice from a qualified mortgage broker who has up-to-the minute knowledge of the deals available across the whole of the market is more important than ever. Most people will change mortgages a few times throughout their life, whereas a mortgage broker spends all day every day comparing mortgage deals, and looking for the best option.
No matter what your circumstances are, a mortgage broker can tailor their search to ensure they find the most appropriate deal for you, whether you’re looking to save money, borrow more, or simply future-proof the affordability of your home loan.