With each interest rate hike announced by the Bank of England, a collective shockwave is felt by millions of UK mortgage payers. Having recently confirmed the single biggest interest rate increase in 33 years, the BoA has dealt no less than a hammer blow to already cash-strapped homeowners.
The simple fact of the matter is that each time base rates increase, so do mortgage rates. Some disproportionately so, depending on the type of product taken out and its provider.
Speaking on BBC Radio 4?s Today programme, money-saving Martin Lewis attempted to put the whole thing into some kind of context. With base rates having been increased by a near-unprecedented 0.75%, Mr Lewis said that this would equate to around £40 per month extra per £100,000 of outstanding mortgage debt.
“So, if you have a £200,000 mortgage, expect it to be £80 per month [more than it currently is],” he warned.
But for those who are currently on introductory fixed-rate deals, this increase in monthly mortgage costs is not something that will happen instantly. Martin Lewis, therefore, advised those with such mortgages to consider taking action, in order to avoid a sudden (and potentially insurmountable) increase in their monthly outgoings.
“Make sure you know now the date when your fixed rate ends,” he said.
“I would have a note in your diary six months before that point. That’s the point to start thinking about what you’re going to do, so that you can be in place three months before your mortgage ends.”
Avoiding a 300% Increase in Mortgage Costs
According to Morgan Stanley, the vast majority of households on fixed-rate introductory deals that are set to expire within the next six months will find themselves moving from a low 2% interest rate to around 6%. This will leave millions facing exponentially higher monthly mortgage bills, of which many may not be able to meet their payment requirements at all.
“It’s going to be an absolutely enormous shock for most people,” warned Lewis.
His advice was fairly straightforward – take action as early as possible, rather than simply accepting this monumental increase as an inevitability. For anyone who is worried about a potential 300% increase in mortgage costs (which should be anyone with a 2% deal set to come to an end in the near future), it is essential to consider all the available options to avoid such an eventuality.
One option (and the preferred initial option) is to contact the mortgage provider directly. Contrary to popular belief, lenders do not want their customers to fall into arrears, or to face difficulties meeting their repayment obligations. It is both costly and time-consuming for banks to chase missed mortgage payments, and nobody wins when homes are repossessed in the case of defaults.
Your lender may be able to provide you with a variety of options, such as extending the term of your mortgage to reduce your monthly repayments. It may also be possible to move to an interest-only mortgage (temporarily or permanently) to help minimise your monthly outgoings.
If you have good credit and are in a generally strong financial position, remortgaging is worth considering. This is where you effectively switch to a new provider, who issues a mortgage to pay off your existing debt at a lower rate of interest.
Alternatively, overpaying on a mortgage with a worryingly high rate of interest can be a good way to save significant sums of money long-term.
“Overpay if your mortgage rate is higher than the rate you’d earn saving,” Lewis advised.
“Overpaying can save you tens of thousands of pounds over the lifetime of a mortgage.”
