In the current climate everyone with or without a mortgage is concerned with the sharp increase in interest rates. We are regularly asked How will this affect my mortgage payments when my current mortgage deal expires.
Everyone will be affected differently by the current increase in interest rates. It will depend entirely on your individual circumstances and unfortunately interest rates have risen and may continue to do so. Even if they interest rates start to level off there has been a huge increase and people with mortgages coming off fixed rates in 2023 could see a huge increase to their monthly payments.
As a general rule for every £100,000.00 of mortgage you owe, if your interest rate was to rise by 1% and you were to keep the term of your mortgage the same, you would pay roughly an extra £55.00 per month, resulting in an annual increase of £660.00.
The average loan size in the UK (2021) was £137,934.00, which means the average household will see an increase of £79.00 per month for every 1% extra interest.
Naturally people are worried about the difference in what their payments have been to what they will be. The bigger your mortgage the more affected you will be. There could also be a big difference for customers coming to the end of their current deal, if they have been paying a low rate.
The below representative example shows how much clients could soon be paying if they had a mortgage of £250,000 with an increase in interest rate of 2.5%.
The Impact will be Worse for Customers on Interest Only
A £225,000 interest-only mortgage at 2% which increases to 5% would see monthly payments increasing from £375 to £938, an increase of 150%. Whereas the same mortgage on a 25-year repayment term would increase from £954 to £1,316 per month – an increase of 37.9%. This is still a large increase for both parties.
As the above shows the impact for mortgage customers will be significant and mortgage customers want to know what options they may have to try and reduce/lessen the impact of the current rate rises.
What Can You do to Reduce the Impact?
If your current fixed period on your mortgage is to come to an end in the next year, then there are some steps you may be able to take to help reduce the impact of the interest rate rise. As stated already, everyone’s circumstances are different and what may be possible or the right decision to take for one person won’t be suitable for another.
We would always suggest speaking to a mortgage broker about your options. They will be able to discuss your individual circumstances in more detail and run through multiple scenarios for you to find out what will work for your situation. Below are a few potential ways you may be able to lessen the impact.
Extend your Term
You may be able to extend the term of your mortgage which can reduce the total monthly payment you have to make. Factors that impact on your ability to extend the term are your age, your retirement age and the current term you have. Although this method would decrease your monthly mortgage payment, it will increase to the total amount of interest you would pay back over the full term. A mortgage broker would discuss this detail with you to give you a full picture.
Overpay on your Current Mortgage
This may sound a bit strange considering this article is about how to save money, but overpaying on your mortgage now whilst the current interest you are paying on the mortgage is low will have a greater impact than paying the same amount but at a higher rate of interest.
We would only suggest this if you have the ability to do so. Most mortgages allow you to overpay a total of 10% of the mortgage balance per year.
You should always consider this option against the benefits of putting the money into savings to work out which would be the best option for you.
Secure a New Rate 6 Months in Advance
Don’t assume you have to wait until your existing deal finishes before you can start the ball rolling. Many remortgage offers are valid for six months from the date they are issued.
That means even if, for example, you’ve got five months left to run on your existing deal, you can apply for your new mortgage now.
Provided your application is accepted, you can arrange with the lender for it to begin as soon as your current deal finishes. Once you have secured your offer it means any new rate rises will not affect your new mortgage so being prepared 6 months in advance is important.
Make Sure You Have All Your Documents Prepared
As a mortgage broker firm we have seen it time and time again.
- A customer is told what product they can obtain.
- We ask them to provide their documentation required for the mortgage.
- The customer has not prepared these documents and provide them a week later.
- In this time the interest rate they were eligible for have now gone and as a result they will now have to pay a higher interest rate.
Don’t let this happen to you. See our handy guide on what documents you might need to provide.
About Switch Mortgage Finance
We have highly experienced mortgage brokers ready and willing to assist you with your mortgage needs. We are a whole of market broker meaning we have access to the best deals on the market. Regardless of your situation we will be able to give you tailored advice to help achieve your objective. So get in touch for no obligation quote.