Recent mortgage rate rises may have left you feeling concerned about what you’ll have to pay if your fixed-rate mortgage deal ends in 2024 or beyond. Read on for some advice on preparing for the future.
Will your future mortgage payments be affected by recent rate rises if your fixed rate deal is ending in 2024 or even 2025? Is there a chance that rates may have come down by the time your deal ends?
Higher rates could remain in place for some time to come. Earlier this week, the cost of mortgages reached a 15-year high. The Bank of England increased the base rate for the thirteenth consecutive time last month, from 4.5% to 5%, in a bid to combat inflation.
Higher interest rates than a year ago
Interest rates are significantly higher than a year ago. At the time of writing, the average two-year fixed rate deal was standing at 6.78%, according to Moneyfacts. In the same period last year, the average two-year fixed rate was 3.74%. However, it’s important to remember that these figures are broad averages across the entire mortgage spectrum.
MB Associates’ Sales Manager Phil Leivesley explains: ‘Moneyfacts collates every mortgage product that is available on the market at any given time, from standard deals offered by high street lenders to more specialist providers. The specialist providers can provide help to borrowers who have complex incomes or might have had some significant credit issues in the recent past, but such lending often comes at much higher rates. This means that the average two-year fixed rate quoted by Moneyfacts is a mean average of all the products in the market, but it isn’t a median average of what a typical borrower will pay. Most borrowers will therefore pay less than the figure quoted.’
From our own mortgage transactions, we’re currently seeing the average fixed-rate mortgage (for any term) at around 5.9% compared to 3.5% a year ago.
Will interest rates remain high?
No one can say for sure what will happen in the next few years, but higher rates are likely to persist for longer than previously anticipated. It’s sensible to hope for the best but plan for the worst. Prepare now for the strong possibility that you could well be paying more when your fixed deal comes to an end.
‘It’s highly possible that rates will stay higher for longer than the market initially assumed,’ says Phil. ‘If you’re in that situation, and you have 12 to 24 months left on your current deal, I’d strongly urge you to think about what the impact on your lifestyle would be if your payments were to increase.
‘I’m mindful of groceries and prices going up in general,’ adds Phil. ‘But if it’s possible, I would strongly advise you to consider making overpayments to your mortgage now or setting an amount of money aside each month and putting it in your savings.
Phil adds: ‘This would mean you’re preparing yourself for what future payments might be. However, when you make overpayments to your mortgage, you don’t pay any interest on the overpayment amount; the balance just reduces by the amount that you have overpaid.’
Reducing your mortgage balance
This means that regular monthly overpayments can make quite a difference when it comes to reducing the balance on your mortgage. Essentially, it means you’ll be paying off your mortgage sooner. When you come to the end of your fixed-rate deal, your mortgage balance will be lower, which will not only mean you’ll have less to pay off, but you may also be more likely to secure a more competitive interest rate on a new deal.
While this is one potential solution, it may not be for everyone. ‘You are tying up your cash by doing this,’ says Phil. ‘You might want to look at the savings route as well, where you can still access the money you’ve set aside. Either way, you’ll have committed yourself to paying a higher amount than you’re currently paying. If interest rates go down in future, you’ll end up having more cash than expected.’
If you’re unable to make any higher payments now, when the time comes to switch to a new deal, you may be able to extend the term of your mortgage (depending on your age) or even switch to an interest-only mortgage. However, the criteria for an interest-only mortgage can be quite rigid, and you’d need to have a substantially high income.
We’re here to help with advice.