For Britons buying their first home or chasing a new deal the maelstrom in the mortgage market is the stuff of nightmares, with products being pulled right, left and centre, and no end in sight as the Bank of England raises interest rates yet again.
As the consumer champion Martin Lewis put it this week: the mortgage “ticking timebomb” has “exploded”, with homeowners, already hobbled by the cost of living crisis, now racing to replace low-cost deals that are expiring.
The numbers are stark. More than 350,000 borrowers will come off a fixed-rate deal between now and the end of September, according to the Office for National Statistics. About 200,000 of them are on a deal priced at below 2%.
Today the typical rate on a two-year fix is just over 6%, a lurch upwards that will force some households to find hundreds of pounds more every month.
About 1.4 million mortgage holders – half of whom are under 40 – will see their mortgage payments rise by at least 20% of their disposable income, according to the Institute for Fiscal Studies thinktank.
Sarah*, a 33-year-old mother of two toddlers from the Peak District, and her husband are among the many young families hard hit by the back-to-back rate rises that have propelled the base rate from 0.1% at the end of 2021 to 5% today.
“We are trying to remortgage now, we applied over the weekend,” she says. “Our original rate two years ago was 1.05%. Now it looks like it will be over 5%, and we’ll be adding years on to the term and potentially paying £500 more a month, nearly doubling our payments.
“We spend about £800 a month on childcare, and had to buy a fixer-upper to get on to the ladder,” she adds. “Now it’s highly unlikely we’ll be able to finish renovating for years. Somehow we are in a much worse position than when we were renting.
“I don’t know anyone who has had as steep a rate hike as ours, possibly because we bought at the worst possible time, at the peak during Covid, when interest rates were extremely low but everyone went mad for houses. We went to best and final offer on 13 houses before we got ours.”
For first-time buyers, the great rate reset is stretching affordability in some cases to breaking point; some are having to drop out of the race, while others must reassess the type of property they can afford.
Here we look at the options, whether you are remortgaging or trying to get the keys to your first property. We consider the pros and cons of extending your mortgage term, as even 40-year loans become more commonplace, or moving to an interest-only deal. We also look at what to do if you are unable to cope with higher mortgage payments on top of everything else.
My fixed-rate deal is coming to an end
“Don’t do nothing” is the advice offered by David Hollingworth, an associate director at the broker firm L&C Mortgages. “It is easy to be befuddled by the amount of change we are seeing in the market and get into what I call ‘analysis paralysis’.”
But that inertia is “probably going to cost you more”, he warns. A variable rate tracker – where the interest rate you pay is pegged to the base rate – is an option for those who don’t want to lock into a fix at the new elevated rates, he says: “That is going to be substantially better than drifting on to your lender’s standard variable rate, which is nudging above 8% in some cases.”
Remortgage offers are typically valid for up to six months, so brokers suggest starting your search with this amount of time left to run on your current deal.
If the cost of new deals does come down by then, you are not committed to take up a mortgage offer. But if they have risen, you have at least locked in at a lower rate, even if it doesn’t feel like a great result. Also, if you have some savings, you may want to think about using some of that cash to overpay before making a remortgage application.
If your deal is ending in weeks rather than months, these are difficult times. Deals are coming and going at breakneck speed as lenders react to jittery financial markets and expectations that the base rate will peak at 6% later this year.
If the clock is ticking it is worth discussing a product transfer with your current lender rather than chasing a new deal elsewhere as this will avoid the need for a new affordability assessment.
Should I stretch my mortgage term?
A standard mortgage used to run for 25 years but marathon loans spread over up to 40 years are becoming more commonplace as first-time buyers and movers try to keep a lid on their monthly payments.
The number of first-time buyers opting for a mortgage term longer than 35 years more than doubled during 2022 to 17%, according to UK Finance. The number taking out a loan over 30 to 35 years also increased – from 34% to 38% – during the same period.
Back-to-back interest rate rises mean those moving home are also using longer terms to reduce their monthly commitment. Indeed, the number of home movers taking out terms of more than 35 years doubled to 8% in 2022, while for 30- to 35-year terms, the figure increased from 21% to 26%.
Hollingworth says the mantra is usually “the shorter the term, the better” but with buyers looking for practical solutions to best manage their budget, a longer term can help.
While lengthening the duration of a home loan can give a buyer some breathing space, the flip side is that you end up paying a lot more interest, since you reduce the mortgage balance more slowly.
Based on a £150,000 repayment mortgage with a rate of 5.5%, on a 25-year basis, the monthly payments would be £921 and the total interest bill would come to £126,339. Change that to 35 years and the payments drop to £806 but the interest bill shoots up to £188,318.
Go to 40 years and the monthly outlay drops again to £774 but the interest on the loan is a whopping £221,357.
If things go well, borrowers can, of course, make overpayments and reduce the mortgage term when they remortgage. Unlike with, say, an interest-only mortgage, you own a property at the end. “It costs more over the long term but you will at least reduce the capital balance and have paid it off at the end, even if it is 40 years later,” Hollingworth says.
What if I am a first-time buyer
This is, needless to say, a really tough time for those hoping to buy their first home. The number of products available for buyers with small deposits has fallen by more than 40% in the past year to about 200 deals at last count. Over the same timeframe the average rate on a two-year fixed 95% loan-to-value mortgage has increased by more than three percentage points to approximately 6.5%, while five-year products are up more than two percentage points to 5.8%.
Now, not only is there jeopardy around securing a deal there is also the worry about the direction house prices are heading, with the latest market snapshot from Halifax showing UK house prices posting their first annual fall in more than a decade.
Most experts agree first-time buyers need to prioritise saving up as big a deposit as possible and to make sure their credit file is in good order. They should also try to pay off outstanding debts where possible and rein in their regular spending.
Jon Cooper, the head of property at Aldermore, says first-timers should discuss with a broker the steps they need to take. The current maths may mean, for example, scaling back their ambitions from a two- to a one-bedroom property.
“The broker will advise if it’s the right time for them to proceed or not,” Cooper adds. However, in a glimmer of good news, he says first-timers who have done their homework properly are progressing through the system.
I am worried about losing my home
The government has been under growing to pressure to do something to help homeowners and at a meeting with bank bosses on Friday agreed a number of measures, including that homes won’t be repossessed within 12 months of a missed payment.
The so-called “mortgage charter” also included the promise that customers could seek advice from their lender without it affecting their credit score. Customers are also to be allowed to switch to an interest-only deal for six months; or extend their mortgage term and revert back within six months if they want.
If you are in trouble don’t bury your head in the sand; discuss your circumstance with your bank or building society. Earlier this year the Financial Conduct Authority made it clear that it expects firms to support mortgage borrowers in financial difficulty.
The majority of lenders also offer a mortgage payment holiday, says Nick Mendes, the mortgage technical manager at the broker John Charcol. The length depends on the firm and some will only allow a pause if the loan-to-value of the remaining mortgage is below 80%.
“A typical short break can range between one and three months but can also extend to 12 months,” Mendes said. “To qualify, you’ll often need to prove that you’ve made payments on time for a minimum period set by the individual lender.”
A holiday, of course, is a short-term fix rather than a solution and Mendes says it is important that homeowners realise that “sub-2% rates aren’t the norm and should not be used as a benchmark of where rates will return to in the future. A mortgage is a long-term commitment, which ultimately means you must take the rough with the smooth.”
For homeowners who are now priced out of their own mortgage the coming months will require a lot soul-searching. “While it can be particularly emotional to consider selling the home, this cannot be ruled out,” Mendes says. “With higher mortgage rates expected to be the norm, it might be in the best interest to move into a smaller property and reduce the mortgage balance to one which is affordable.”
* Name has been changed