After this week’s latest base rate hike from the Bank of England, thousands of people with mortgages could be set to face higher monthly payments, but there are ways to keep costs down.
Mortgages and savings rates could both be affected in some way by the Bank of England base rate rise, even while many lenders and banks try to remain competitive in the current market. Rates offered to consumers may not instantly reflect the latest hike, though.
People with fixed rate mortgages – including both homeowners and investors – will at least not feel the effects immediately, but those who are set to remortgage may be concerned about what deals can be secured now. Likewise, many tracker mortgages will be on the up.
But it is those on their lender’s standard variable rate (SVR) who are being the most strongly urged to reassess their options and fix into a deal, even if fixed rates are also climbing, as it will be significantly cheaper than the SVR.
What are average mortgage rates now?
The latest figures released by Moneyfactscompare show that interest rates across all mortgages increased over the past month. The average two-year fix is now 5.49% (up from 5.26% in May), the average five-year fix is 5.17% (up from 4.97%), and the average 10-year fix is 5.25% (up from 5%).
However, the average SVR is now considerably higher, at 7.52%, up from 7.37%. While SVRs have always been higher than fixed options, it could now make a real difference to borrowers.
At the end of a fixed term, if you do not choose a new product, you will automatically be switched to your lender’s SVR. Some borrowers also opt to go onto an SVR temporarily for other reasons, such as saving an additional sum of money in order to acquire a better fixed rate, or planning on selling a property.
According to data from UK Finance, there are around 800,000 fixed rate deals coming to an end in the second half of this year, while a further 1.6 million are set to end in 2024. So there will be a lot of property owners whose mortgages might be about to get much more expensive.
A 0.5% increase will raise the average monthly mortgage payment of someone on an SVR by £30.28, and this will be much higher for someone with a higher level of borrowing.
There are around 8.5 million mortgages outstanding in the UK at the moment, says UK Finance, and the majority of these are on a fixed rate. However, it is interesting to note that the percentage of buy-to-let mortgages on an SVR is much higher than in the standard residential market.
The figures show that 81% of all residential mortgage holders have a fixed rate, 8% have a tracker and 9% have an SVR. Meanwhile, 66% of all buy-to-let mortgages are fixed, compared with 14% on trackers and 18% on the SVR.
What can be done?
Even though mortgage rates are on the rise, there are options available to those who want to find ways of keeping their costs down. Paula Higgins, chief executive of The HomeOwners Alliance, sets out four ways to help with mortgage payments:
- Extend your mortgage term, for example from 20 to 25 years, so you can pay less each month (although you’ll pay more interest overall)
- Reduce your monthly payments for a set period of time, while you sort out your finances
- Offer a mortgage holiday: This is when you take a break from repaying your mortgage, although interest continues to accrue during this time.
- Switch to interest-only repayments: This means only paying off the monthly interest owed on your debt and not any of the capital; it would cut your monthly mortgage payments but you’ll need to have a plan for how you will eventually repay the capital.
Paula adds: “During the post-lockdown property boom of 2021, the government encouraged people to get a mortgage and buy homes with incentives like the stamp duty holiday.
“But as homeowners emerge from deals secured at that time – including a 2 year fixed rate at 0.79% – they’re in for a very real shock as average mortgage rates have now hit 6% for a 2 year fixed rate.
“Government should work closely with lenders to ensure they are fulfilling their duty of care by proactively helping their customers who may be struggling to meet payments.
“There are creative ways to do this, for example by offering a longer mortgage term or interest-only payments, but not at the detriment of a poor credit rating that will affect them for years later.”