The New Year's £19bn Mortgage Bill Facing Home Owners
- BetterAskAdam.com
- Jan 5, 2024
- 7 min read
Updated: Jan 16, 2024
Homeowners are facing a £19bn increase in mortgage costs as millions more fixed-rate deals expire.
Up to 1.5m households are expected to reach the end of cheaper deals in 2024 – with an increase in annual housing costs of about £1,800 for the typical family, according to the Resolution Foundation think tank.
Interest rate cuts should be coming and the Bank of England is widely expected to cut rates to below 4% by the end of the year, the base rate is currently 5.25%.
In anticipation of lower rates to come, a range of mortgage providers have begun a bidding war for those looking to re-mortgage, by reducing the rate of their new fixed rate deals.
HSBC, Halifax and TSB have updated their fixed-rate deals. The average rate on a two-year fixed rate mortgage has fallen to its lowest level for over 6 months.
HSBC was the first to make the move, cutting rates by up to 0.85 percentage points, with a five-year fixed rate of 3.94% . The reduction would save someone with a £200,000 25-year mortgage £1,152 a year in repayments. It also released a two-year fix at 4.49%.[1]
But headlines about a mortgage bidding war and the offer of lower rates, can give a misleading impression. For the 1.5 million households who are having to look for a new deal, even the recent fall in the cost of mortgages, will be facing a huge rise in costs compared to the real they have had previously.
In 2022 a fixed rate deal was a little over 2%. Many deals are now just under 6% and the best is over 4%. So the cost has rise 2 or 3 fold. [2]
So although interest rates are expected to fall, anyone who fixed their mortgage before 2021/22 may be coming off a very low rate and moving to a much higher rate.
Helping Hand
The government brokered a deal with the major lenders to sign up to a Mortgage Charter which can help those in difficulty with their mortgage payments. The Mortgage Charter commits lenders to the following: [3]
A borrower will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment
Customers approaching the end of a fixed rate deal will have the chance to lock in a deal up to six months ahead. They will also be able to manage their new deal and request a better like for like deal with their lender right up until their new term starts, if one is available.
A new deal between lenders, the FCA and the government permitting customers who are up to date with their payments to: Switch to interest-only payments for six months or extend their mortgage term to reduce their monthly payments and give customers the option to revert to their original term within 6 months by contacting their lender
Fixed or Variable?
One of the best variable rates currently on the market is from the Progressive Building Society, which offers 4.59% for 2 years.
One of the best fixed rate mortgages is from First Direct 4.54% for 2 years.
But rates change very quickly [4] and is it worth having a good look round.
But in deciding whether to go fixed or variable, it isn't just the rate that you should look at. Having a fixed rate deal gives you peace of mind that you can afford your , whatever happens to interest rates, during the period of the fix. So even if the fixed rate deal may turn out to be more expensive than the variable deal, it might be worth having to reduce your stress.
The Mortgage Translator
There are a whole bunch of terms which you will come across which can be very confusing, but it is worth spending a few moments getting used to the terms as it will arm you with the power to understand the product you are getting.
Mortgage: Not that you really need to know this, but it's kind of fun to know the rather grim origin of the word. The word mortgage comes from the Old French word “morgage”, which directly translates to “dead pledge”. (The prefix of the word, “mort”, means dead, while the suffix, “gage”, means pledge.)
Fixed Rate & Standard Variable Rate: The interest rate you pay will stay the same throughout the period of the mortgage, no matter what happens to interest rates elsewhere. The fixed rate period doesn't;t usually last for the whole period of the mortgage, it usually only lasts 2-5 years. After that, the mortgage would usually move to the standard variable rate (SVR). The SVR is usually significantly higher than your fixed rate. If you are on an SVR, you can often save money by re-mortgaging and moving to another fixed or discount variable rate mortgage.(See below)
Discount Variable Rate: This is a discount off the lender’s standard variable rate (SVR) and applies for a certain length of time, usually two or three years.
.
Offset Mortgage: This links your mortgage to a savings account. In doing that, it reduces the amount of interest charged on your mortgage balance by the money you earn in a savings account. In other words, any money in the savings account can be used to reduce the overall balance owing, which means you’ll pay less interest on your mortgage. Offset mortgages work by ‘offsetting’ the balance in your savings account against the mortgage balance so the interest you pay on borrowings is reduced.
Interest Only Mortgage: With an interest only mortgage, you only pay back the interest each month on the money you’ve borrowed. At the end of the mortgage term, you’ll still owe exactly what you borrowed so you’ll have to find a way to pay off this amount. You might prefer this, if you expect a large sum of money in the future or plan on selling the property to pay the debt. However the risk is that the property isn't worth what you borrowed and therefore you could have no property and still have a debt to pay.
Endowment Mortgage: At one time, mid-1980s to the 1990s, endowment policies used to be by far the most popular mortgage repayment vehicle. Their attraction was that the monthly mortgage cost was little or no higher but that there was a realistic prospect of a large ‘bonus’ over and above what was needed to pay off the mortgage at the end of its term. Changing economic conditions and tax law changed this equation substantially against the borrower. Many endowment policies matured well below their target value leaving homeowners with hard decisions to make about what to do. One route, encouraged by claims management companies, was to seek compensation. Compensation claims for mis-sold endowment mortgages was the first of the mass retail compensation ‘scandals’
Endowment providers now issue review letters as standard practice. A system of red, amber and green warnings is used to signal the need to take advice now, to continue to monitor, or take no action for now.
Early Redemption Fee: Most mortgage products charge an early repayment charge if you make overpayments beyond a specific amount, which is typically 10% of your remaining balance. However, if you think you might be able to pay it back early or will want to move mortgage - look for one where overpayments are allowed.
Capped and Collared: Capped and Collared deals are variable mortgages, with interest charged at a variable rate but which cannot rise above a fixed level [the cap] or below a certain level, the collar.
APRC: APRC stands for Annual Percentage Rate of Charge. It shows you the total cost of a mortgage, including fees, over the entire term of the loan, not just the fixed or discounted period. The APRC can be very significantly higher than the headline rate. That might not necessarily be something to worry about if you can remortgage once the discount or fixed period ends - but it does show you what the true cost would be, if you stay with the mortgage for the full term. AER (annual equivalent rate) is usually used to compare savings accounts rather than mortgages and loans. It works by assuming you’re going to put your savings away for a year. It takes into account compound interest, plus any bonus introductory rates.
Fees: Mortgage providers usually charge a fee to start your mortgage. If you end up switching mortgages every few years, you could find yourself hit by arrangement fees every time you take out a new deal.
Mortgage Broker: This is a specialist who works a bit like an estate agent and looks around to find you the best deal. Some charge you for the service but others take their commission from the lender.
Should I Pay-Off My Mortgage Early?
Arguments Against:
Some debts, such as credit card or loans, may have higher interest rates, in which case your money could be better placed repaying those debts first.
Most mortgage products charge an early repayment charge, so paying it off can cost you more than you think. It's worth checking this out before you get your mortgage.
Some debts, such as credit card or loans, may have higher interest rates, in which case your money could be better placed repaying those debts first.
Even if you are able to pay off your mortgage early or make some overpayments, it may be possible to earn more interest on your savings than you would save by repaying your mortgage - this is especially true when the Bank of England base rate is high
Paying off your mortgage, may leave you without any funds for unexpected bills, so be careful to ensure you are comfortable with what paying it off will mean for your overall finances.
Arguments For:
The biggest argument for paying the mortgage early, is that you will pay a lot less in interest and can save thousands of pounds.
You'll own your home. That removes pressure on you to keep earning to pay the mortgage bill in the future.
Although there are less bullet points under 'Arguments for' paying off your mortgage, don't let that mislead you - if possible, it's generally a great position to be in.
Putting Yourself In The Best Position To Get A Good Deal
In lending you the money for your mortgage, lenders will look at a number of factors. Here are some tips on how to look most appealing to the lender:
You’ll need a good credit history. You can check your credit score with the main credit reference agencies such as Experian and Equifax
How long you borrow for – mortgages are generally 25 years. But extending the term will lower your monthly repayments, but the cost of the loan will be higher as you’re paying back more interest.
Generally putting down a bigger deposit will give you access to better deals.
Property Prices
The average asking price of a home in Great Britain has seen the biggest New Year bounce since 2020, rising by £4,571 (+1.3%) this month to reach almost £360,000, according to RightMove (Jan 15th 2024)
And in the Halifax said: "“In December, the cost of an average UK home rose for the third month in a row to £287,105, up +1.1% ...reaching the highest level since March 2023."
[1] https://www.thetimes.co.uk/article/mortgage-rates-cut-as-new-year-price-war-intensifies-8k6bvkqx6
