Mortgage brokers are urging homeowners to review their loan terms and see if they could avoid a potentially ‘devastating’ rate rise that has been forecast as a worst-case scenario for 2023.
Mortgage payments could increase by hundreds of pounds a month if the Bank of England’s base rate was to rise, as the Office for Budget Responsibility forecast ahead of Wednesday’s Budget.
The base rate is set to rise from its current record low of 0.1 per cent in the coming months in a bid to curb rising inflation.
Homeowners could face paying hundreds of pounds more for their mortgage each month, in the event of a base rate rise to 3.5%. This measure may be taken to try and curb inflation
The amount it will rise by is not yet known, but yesterday the OBR warned of a worst-case scenario whereby a ‘wage spiral’ or energy price shock would cause the base rate to increase to 3.5 per cent in 2023.
This would potentially see mortgage repayments rise by a quarter.
The OBR’s ‘central forecast’, however, predicted increases to 0.75 per cent. In this case mortgage payments would typically increase by around 8 per cent, after years of historical low home loan rates.
This is Money has outlined what this could mean for homeowners with different mortgages below.
The figures are based on the assumption that mortgage rates would increase to the same degree as the base rate.
Although this may not be the case exactly, the bank rate does have a strong influence on how lenders price their mortgages.
|Mortgage rate now||Monthly payment – £200,000 mortgage||Monthly payment – £500,000 mortgage||Rate on remortgage at same % LTV in 2023 (+3.4%)||2023 Monthly payment – £200,000 mortgage||2023 Monthly payment – £500,000 mortgage|
|Mortgage rate now||Monthly payment – £200,000 mortgage||Monthly payment – £500,000 mortgage||Rate on remortgage at same % LTV in 2023 (+0.65%)||2023 Monthly payment – £200,000 mortgage||2023 Monthly payment – £500,000 mortgage|
If mortgage rates were to increase by the same level as the base rate by 2023, homeowners could end up paying hundreds of pounds more every month.
In the worst-case scenario of an increase to 3.5 per cent, a household with a £200,000 mortgage on one of the cheapest rates available today, 0.9 per cent, is currently paying £745.
Were the base rate to increase from 0.1 per cent to 3.5 per cent in 2023, and their mortgage by the same amount, the cost would rocket £344 to £1,089.
For those with larger loans, the cost increases would be even more dramatic.
Take the example of a young family who just bought their first home in the South East with a £500,000 mortgage. As they did not have a large deposit, they are currently on a higher mortgage rate of 3.5 per cent.
Were that to increase by the same level as the base rate in 2023, their monthly payment would soar from £2,503 today to £3,502 – just shy of £1,000.
The market has not seen rates as high as this since 2008 and many borrowers would find such an increase devastating
Dominic Lipnicki, mortgage broker
Even with the less severe rise to 0.75 per cent, remortgaging onto a comparable deal post-2023 would still cost families hundreds every year.
Those with a £200,000 mortgage on a 0.9 per cent rate today would see their payments rise £50 each month or £600 a year, while homeowners with larger mortgages could see increases of up to £175 a month or £2,100 annually.
Dominic Lipnicki, director at mortgage broker Your Mortgage Decisions, said: ‘For many borrowers, the idea that the Bank of England base rate could increase to 3.5 per cent by 2023 is very scary indeed.
‘Those used to record low fixed rates would be shocked to see their payments balloon if such an increase became a reality.
‘The market has not seen rates as high as this since 2008 and many borrowers would find such an increase devastating.
‘Many borrowers who are either on the lender’s standard variable rate or a few months away from their fixed rate scheme expiring will be keen to secure a new deal now to avoid that risk.’
The OBR’s more severe forecast suggests the Bank of England’s base rate could increase to 3.5% in 2023 in the event of a ‘wage spiral’ – but another forecast was less dramatic at 0.75%
The OBR’s own figures on the real cost of mortgages sit somewhere in between the two tables.
It has suggested that homeowners need to be braced for a 14 per cent leap in the interest element of their monthly mortgage payments by the first quarter of 2023.
If the homeowners had built up more equity in their property during their last fixed term and could put down a larger deposit when they remortgaged, they would probably be able to decrease their rate slightly.
However, their monthly payments would still be more expensive than they are today.
The shock of the rise in interest rates will be compounded by the fact that rates now are very low.
In the past few months they have hit record lows of less than 0.85 per cent, although banks are already starting to marginally increase them on the back of base rate speculation.
Lenders are already starting to admit they will need to bring rates up more substantially sooner or later.
John Eastgate, managing director of property finance at lender Shawbrook Bank, said: ‘There are early signs of upward pressure on mortgage rates, with markets anticipating a base rate rise.
‘Competition cannot hold prices back indefinitely.
‘At some point we will start to see movement, and the historically low rates that we have today may have a very short shelf life. We could see upward momentum as early as the first quarter next year.’
Brokers have urged borrowers to review their mortgages, and see if there is a chance they could avoid the base rate rise by fixing on one of today’s low rates for two or five years.
In particular, they implored anyone on their lender’s standard variable rate to urgently consider switching.
These are lenders’ ‘default’ rates which borrowers drop on to when a fixed-term deal ends, and they are usually much more expensive.
However, unlike cheaper fixed deals, there is usually no penalty to remortgage away from one.
At the moment most lenders have set their SVR at more than 4 per cent, and as these are also influenced by the base rate, they could even go over 7 per cent in the OBR’s worst-case scenario.
Peter Beaumont, chief executive at The Mortgage Lender, said:’ For some, depending on the deal they are on, the financial benefits of remortgaging could outweigh any charges, especially during this period of record-low rates.
‘For anyone tied to a standard variable rate, then the best bet is to refinance as soon as possible.’
Fixing a mortgage on a lower rate now will allow households to budget for the next few years, making their mortgage a predictable cost at a time when the price of other household necessities is rocketing.
Visiting a mortgage broker may be worthwhile for homeowners, as those in a position to remortgage could lock in a lower interest rate now and avoid a potential spike in 2023
Stuart Powell, managing director at Ocean Mortgages, said: ‘Looking at current rates available versus what is likely to happen to rates is shocking.
‘An increase in mortgage payments of more than £300 per month may be a stretch too far for many homeowners, especially with rising inflation and fuel bills to pay.’
Those who are coming to the end of two-or five-year fixes would also be wise to lock in another new deal now.
A new rate can be locked in up to six months before the end of a borrower’s current term.
Some brokers even suggested considering paying an early repayment charge to exit their mortgage early, if they were convinced that rate rises at the end of their current term would be steep – although, this could be a gamble and is a drastic step to consider.
Lewis Shaw, founder at Shaw Financial Services, says: ‘People that are due to exit their mortgage deal in 2023 may want to consider taking the hit of a redemption penalty if they have sufficient funds to do so, and tie to a longer deal now to protect against possible jumps in mortgage rates.
‘But this comes with the huge caveat that the OBR is right. Unfortunately, there is no way of determining this.’
ERCs can be up to 5 per cent of the total mortgage amount, though some lenders taper them as low as 1 per cent in the later years of the fixed term.
Anyone considering this would be wise to discuss their options with an independent broker first.
Home run: Fixing a home loan for five years now could result in significant savings ahead
Taking a five-year fix was recommended by some as a way of getting over the rate rise ‘hump’ coming in 2023.
Around 45 per cent of all mortgage holders are currently on a five-year deal.
Sami Bickford, manning director of Plymouth-based broker The Mortgage Girl, said: ‘Our mortgage advice process has always started with the question “Is there any reason you can think of that you would not want to fix your interest rate for five years or more?”‘
Mortgage approvals slide in September
The number of mortgages approved fell to their lowest level since July 2020 in September.
There were 72,600 approvals for house purchases, according to the Bank of England, the lowest amount since the temporary stamp duty holiday was put in place.
However, the amount borrowed soared to £9.5billion – the highest level since June this year.
This was up from £4.4 billion in August, and the Bank said ‘the increase was driven by borrowing ahead of the complete tapering off of lower stamp duty from October’.
Despite the dip, approvals remain above pre-February 2020 levels, the Bank’s Money and Credit report said.
Approvals for re-mortgages, however, were up slightly to 41,500 – their highest level since March 2020.
‘The difference between two and five year rates has been small for years now, so we often advise clients to go for the longer term. This predicted sharp increase in interest rates makes this advice seem even more logical now.’
However, mortgages cannot always be ‘ported’ to another property, so this is not advised for borrowers who might need to move home in the next five years.
Older homeowners considering taking out an equity release mortgages are also being urged to act now, as rates are already increasing significantly in that sector.
Powell added: ‘Equity release rates have already started the upward shift. Six months ago the best interest rate available was 2.24 per cent, now there are no rates under 3 per cent.
‘People considering equity release should act now rather than wait.’
Those who have existing plans are also able to remortgage their homes to a better rate.
Others urged homeowners not to rush into any important life decisions because of worries about mortgage rates, however.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said:
‘Whilst securing a low interest rate is great, it shouldn’t be your main driver in the decision making process.
‘Bigger questions need to be addressed; how long do you think you’ll be in the property, do you need to be able to review things in a few years, have you found a property you love – or are you just making do under pressure to buy now?
‘Consider decisions carefully, and don’t rush them on the basis of possible interest rate increases. A bad decision is a bad decision whether you got a 1.19 per cent deal or a 1.34 per cent deal.’
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