Nearly half a million homeowners face switching to a higher mortgage rate when their fixed term comes to an end later this year.
Data from UK Finance shows around 430,000 two-year fixes are due to end in the second half of 2022, with borrowers who benefited from cheaper mortgage rates back in 2020 now facing much higher costs.
Here, we explain what’s happening to mortgage rates and provide a step-by-step guide to getting a good deal when remortgaging.
Mortgage rates up by more than 2% since January
Mortgage rates have been increasing quickly of late, with six in the Bank of England’s base rate resulting in higher costs for lenders and borrowers. Last week, the base rate rose to 1.75%, having been just 0.1% in December.
New research by the mortgage broker L&C found that the cheapest two-year fixed-rate mortgages have risen in cost from 1.34% in January to 3.46% this month.
This means a borrower taking out a £150,000 mortgage on a 25-year term now would pay £159 a month more than someone who took out the same mortgage at the start of 2022.
7 steps to getting the right deal when remortgaging
Unfortunately, higher mortgage rates are becoming a fact of life, but there are some steps you can take to ensure you get the best possible deal when switching. Here are our top tips.
1. Find out when your fixed term is coming to an end
SVR rates currently average over 5%, so you could face much higher monthly repayments if you fail to switch.
2. Don’t remortgage mid-term
With rate rises likely to continue, it can be tempting to remortgage early to snag a deal now before prices get even higher.
In most cases, however, this isn’t the best idea. If you remortgage during your fixed term you’ll need to pay an early repayment charge to your lender. This, when combined with arrangement fees for a new mortgage, will likely dwarf the benefits of switching early.
3. Find out your loan-to-value
If you’re coming to the end of a two-year fix, it’s likely that your new mortgage will have a higher rate than your old one.
There are some crumbs of comfort, however. The monthly repayments you’ve already made may have moved you into a lower loan-to-value (LTV) bracket, which could help you get a cheaper rate.
For example, if you took out a 90% mortgage two years ago, you’ll now own more of the property, so you may be able to remortgage at 85% loan-to-value. The same applies if you can show your home has increased significantly in value – though you may need to obtain a valuation to prove this.
To find out your current LTV, divide the amount you still owe (you can find this on your mortgage statement) by the amount you originally borrowed, and multiply by 100.
So if you owe £125,000 of the £150,000 you originally borrowed, your calculation will be (125,000/150,000) x 100 = resulting in a LTV of 83%.
4. Get a quote from your lender
Remortgaging with your current lender is known as a product transfer. There are some benefits to doing this: you won’t need a new credit check or a valuation, and you may be able to avoid expensive arrangement fees.
On the other hand, with dozens of lenders competing to offer the best mortgage deals, it’s highly unlikely that your current one will give you the very cheapest rate.
You should be able to find out your product transfer rate by logging in to your online mortgage account.
If it’s not there, be proactive and give your bank a call. If you wait for a letter, you might miss out on a better deal elsewhere.
5. Do your research and get expert advice
You can usually arrange a new mortgage up to six months before the end of your fixed term.
L&C says two thirds of its customers are arranging new deals three months early, and one in five are arranging them five or six months early, as they look to get ahead of any further rate rises.
After a series of base-rate rises, mortgage deals have a shorter shelf-life than before, so if you find one you definitely want, it might be a good idea to secure it in advance.
6. Choose the right mortgage term
Two and five-year fixes are the most common types of mortgage, though three, seven, 10 and even 15-year fixed terms are available.
If you’re choosing between two and five-year deals, there’s very little difference between the best rates.
This means it’s best to opt for a term that suits your own circumstances.
A two-year fix will give you flexibility to switch sooner if rates fall, but a five-year fix will protect you for longer if they continue to rise.
Think about your medium-term plans. If you’re planning on staying put in your current home, a five-year fix will offer greater stability. If you might look to move, however, a two-year fix will offer flexibility and eliminate the possibility of incurring early repayment charges.
7. Keep an eye out for upfront fees
When comparing mortgage deals, don’t just focus on the initial rate.
Upfront fees can have a significant impact on the overall amount you’ll pay. Some mortgages are offered fee-free, while others come with fees well over £1,000.
In some cases, a more expensive fee-free deal can be cheaper. For example, a deal at 3.5% with a £999 fee will cost you more overall than a deal at 3.6% with no fee.