How to cope when your cheap mortgage rate ends.
If your cheap mortgage rate ends soon read this useful guide for tips on how to prepare, reduce your costs and secure a great new mortgage deal.
Are you an existing mortgage borrower worried about what happens when your cheap mortgage rate ends? Many mortgage homeowners have seen interest rates increase rapidly over the last 18 months. Fortunately, interest rates appear to have reached their peak. At least for now anyway. However, many mortgage customers face a cliff edge with the prospect of moving over to a higher rate of interest.
Today we will cover:
- Secure a new deal early.
- Ask your lender if you can extend the term of the mortgage or switch to interest only.
- Shop around for the best deals.
- Choose a new product term that fits your plan for the property.
- Consider a variable rate / tracker only if you feel the Bank of England base rates have peaked and will drop.
- Spring clean your basic finances..
Secure a new deal early before your cheap mortgage rate ends.
If you are an existing borrower with a fixed rate ending within 6 months, secure a new deal ASAP. Many lenders allow an application to secure a new mortgage product up to 6 months in advance. Locking down an affordable deal now leaves the door open. You can switch to something better in a few month’s time should there be an improvement in the marketplace. If the rates were to stay the same, or increase before your remortgage date, you won’t have to worry as you secured a better option as early as you could.
Currently, new shorter term fixed rates cost more each month than longer term 5 and 10 year options. However, you won’t be locked in for too long. So, if you feel that interest rates in general may be a little lower in 2025/6 this may time quite well. The risk is that rates may still be high in 2 year’s time and if that is the case then you could have paid less in the interim with a longer-term deal.
If you are not confident that 2 years is enough time for the economic issues to have worked themselves out, then a longer term fixed rate may be fine provided it is affordable. Just be aware that should you spot a great new deal within the fixed rate period, early repayment charges may be payable to secure the new option.
Ask your lender if you can extend the term of the mortgage or switch to interest only.
The UK government have asked mortgage lenders to help their existing customers if they are struggling with mortgage costs. This is called the mortgage charter. Give your lender a call to see if the mortgage term can be extended to help reduce the monthly repayment. This can always be adjusted to catch up later when interest rates are lower.
Alternatively, a temporary switch to interest only may help. This means that your monthly repayments cover just the interest and won’t reduce the balance. It should always be your aim to return to a full capital repayment mortgage as soon as possible. You will need to catch up on those skipped capital payments to repay the mortgage within its planned term. Therefore, when swapping back to a regular repayment mortgage, your monthly repayment may be higher than before.
In either case, it is important to call your lender as early as possible if you feel you are at risk of missing a mortgage repayment. They will be able to help.
Shop around but always consider your existing lender first.
Whenever your cheap mortgage rate ends, begin your search for a new deal by looking at what is on offer from your current lender. At the time of writing this post, deals for existing borrowers were often better than those available elsewhere. This won’t always be the case so it remains important to find someone who can search the entire market for you. However, deals for existing customers can be secured with very little paperwork. They easy to arrange, either online or by phone.
Other benefits of switching to a new rate with your existing lender include:
- You can reserve a new deal up to 6 months early.
- The lender won’t always need a new credit check.
- Further advances can be available at the same time if you need to borrow more.
- No additional affordability checks in most cases.
What to look out for when switching rates:
- Changes to the term of the mortgage or how it is repaid may trigger further checks by the lender.
- Additional work may be required if a borrower is added or removed from the mortgage deed at the same time.
- Your mortgage lender usually asks you to choose from a selection of deals. They do not provide advice regarding which is the best option for you.
- A mortgage broker can manage the switch process for you and may have access to exclusive deals that are even more competitive.
- Some lenders only arrange rate switches via a mortgage broker.
Choose a new product term that fits your plan for the property.
Mortgage lenders have similarities with a casino. Lender’s price their products so that they always win in the end. They are businesses who need to turn a profit after all. Predicting future interest rate increases / cuts requires a crystal ball, and our treasure chest is fresh out of crystal. However, the way a mortgage is priced gives an insight into what a lender thinks will happen in the future.
For example:
- Assume your existing cheap mortgage rate ends in 3 month’s time.
- If a 10 year fixed rate is available at 4.00%, and a 2 year deal is 4.50%, basic logic would say go for the 10 year deal. Mainly because it is cheaper from day one.
- For the initial two years at least you will have done well opting for the 10 year deal. However, what if in two year’s time, a new 5 year deal is available at 3.00%.
- Firstly, your mortgage lender will still have you paying the higher 4.50% amount for another 8 years if you do nothing. Secondly, you may need to pay a large fee for switching deals early. They have priced their original deals around an educated guess that this scenario would pan out after 2 years. They are betting against long term higher interest rates.
- So, your decision is either to forego the new lower deals and continue as you are on 4.50%. Or pay the fee to switch onto a new deal and hope that it was worthwhile in the long run. The lender is the true winner in both scenarios.
During “normal” market conditions you can expect to see shorter term 2 year deals with the lowest initial repayments. Lenders are happy to give you a good deal, but not for too long!. Generally speaking, the longer you fix a mortgage rate for, the higher the rate you will be offered. In these conditions the banks are betting that underlying rates may increase over that period or remain flat.
Try to choose a rate period that matches your future plans. If you plan to sell the house in 2 years, don’t be tempted by 5 or 10 year deals with lower rates. They will have large percentage-based fees to break away early and you will erode any savings you may have made so far. Some mortgages can be taken to a new house without incurring fees but this is subject to the lender approving it at the time and is therefore not a guarantee.
Consider a variable rate / tracker only if you feel the Bank of England base rates have peaked and will drop.
Variable rates, such as trackers which “track” a margin over the Bank of England base rate as it moves up and down, are inherently risky products due to their volatile nature. If you had opted for a base rate tracker in early 2023, you would have seen your monthly mortgage repayment increase almost on a month-by-month basis. Only now are we starting to see the signs that this cycle is nearing its end.
However, once interest rate increases hit their assumed peak, a base rate tracker may look like an attractive option. Especially if you feel that interest rates will start to reduce over the next 2 years or so. Likewise, as the most attractive fixed rate alternatives are available over the longer terms such as 5 or 10 years at present, you may not want to tie yourself in for too long especially if rates do decide to drop back down a little.
If you are considering a tracker mortgage, please read our guide here. There are deals available that have no minimum tie in periods. This means that you can switch to another product/lender at any time without penalty. These can also come with flexible features such as offset accounts to save interest using your savings. There is usually a small premium to pay for this flexibility when compared to a standard tracker.
Spring clean your basic finances before your cheap mortgage rate ends.
You may be facing a large increase in your mortgage repayments but there are ways to limit the impact. Luxury items like the full satellite TV package, ultrafast broadband, takeaways, and streaming entertainment packages are all nice to have but are a real drain on your finances. Generally speaking, they only get more expensive over time. Temporarily cancelling these or opting for a stripped down version can free up a decent chunk of monthly cash. Plus, in many cases you may find that you don’t miss them as much as you thought you would.
Use the money saved to help pay down some of your debts such as credit card balances. Put some away for a rainy day and once you have a year’s worth saved in something like an ISA you could use this to make an overpayment to reduce you mortgage balance.
You can always reinstate the services later if you wish. Provided that you are able to cope financially or if mortgage costs reduce in the future.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
