Tens of thousands of households who signed five year mortgage deals in late 2021 are set to face bill hikes of £300 a month as experts say the “ultra low mortgage era” is over.
The Bank of England began increasing interest rates from their record low of 0.1 per cent in December 2021 – now standing at 3.75 per cent – with mortgage deals following this trend.
Average five-year rates got to as low as 2.55 per cent in October 2021 – according to data website Moneyfacts – before rising to over 6 per cent a year later.
Since then, the cheapest available rates have never fallen below around 3.5 per cent, and average rates have never dropped below 4.5 per cent.
But tens of thousands of households have been shielded from the bill rises seen by many families, having taken on five-year fixes that will not expire until this Autumn.
Now, these homeowners will finally be hit when they come to renew, and many will face bill rises of £300 a month due to another peak in rates caused by the US-Israeli war with Iran.
Mortgage experts said it signalled that the “ultra low mortgage era” was over, as almost all households in the UK are on fixed deals lasting five years or less.
Therefore, there will be nearly nobody left on the super cheap deals seen between 2008 and 2021 by the end of this year.
How much more people could pay
Someone coming off a 2.55 per cent mortgage rate on a 25 year term owing £250,000 would have been paying £1,128 a month.
If they transfer on to another five-year deal at an average rate today of 5.65 per cent, they will now owe £1,476 a month, an extra £348 a month and an annual increase of over £4,000.
“We are now approaching the tail end of one of the biggest adjustments the mortgage market has had to absorb,” said Nick Mendes, a broker at John Charcol.
“Borrowers who fixed for five years in late 2021 were still able to secure rates in the low twos, so for some of those households the jump in monthly repayments when they refinance over the coming months will be substantial.
“For some people that will mean cutting back elsewhere, while for prospective movers it can reduce how much they are prepared or able to borrow.”
Patrick Weightman, a mortgage adviser at TMG Direct, added: “It absolutely shows that the ultra low rate era is well behind us, and the key for customers is good advice moving forward.
“I have recently dealt with clients coming of 1.24 per cent deals and the shock is very real.”
Peter Stimson, director mortgages at MQube, added: “Rates are unlikely to head back to anywhere near where we saw them prior to 2021. Geo-political uncertainty, together now with climate change, is driving inflation, and with it the inability of central banks to cut rates.
“For borrowers and indeed a large number or mortgage brokers, getting their head around this new reality is proving challenging. Understanding that the period 2010-21 was in fact the anomaly rather than the current interest rate environment, when perhaps it is all they have ever known, is difficult.”
What to do if you’re coming off a cheap deal later this year
If you’re coming off a cheap deal in the next four to six months you can usually lock in a new rate now.
If rates rise, you will be able to keep the deal you agreed, but if they drop you can move to a cheaper deal with the same lender or a different one.
Mendes adds: “For anyone outside that four to six-month window, it is still worth preparing early. Reviewing the mortgage balance and running the numbers against today’s rates gives a much clearer idea of what monthly payments could look like when the current deal ends.
“It will not change what is being paid today, but it does give borrowers the time to adjust their expenditure and budget for the increase, rather than having the higher payment come as a shock when they eventually come to remortgage.”
Remember to check different lenders – or have your broker do this – as many deals are far cheaper than the average, particularly if you own a large amount of equity in your home.
If you are still worried about the price you might pay, there are other things you can look at too.
“There are solutions to soften the blow like hybrid part and part mortgages, but real advice is needed to ensure people understand the risks involved,” says Weightman.
These mortgages are split between partly being a typical repayment loan, and partly being interest only. This can lower your bill, but also means that you won’t be working towards owning quite as much equity.
Other options include lengthening your repayment term, which can lower bills in the short-term, but means you repay for longer.
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