Mortgage rates: what you can and should do (if anything) amid the market turmoil
The mortgage market is in turmoil, with several major lenders including Skipton Building Society and Virgin Money being the first to pull their deals from the market completely. Many others including Halifax, HSBC, Santander and TSB have since either withdrawn their fixed-rate offers or replaced them at hugely increased rates. As the turbulence continues, here's what you can and should do, if anything.
More than 1,000 deals have been cut since the turmoil started, according to comparison service Moneyfacts – meaning less choice for mortgage switchers. See our Mortgage Best Buys tool for the latest rates.
Lenders have now replaced some of these deals, but at much higher rates. In fact, rates have increased so much over the past 12 months that the average rates on two-year and five year fixes are now more than DOUBLE what they were in October 2021 (6.07% and 5.97% respectively), Moneyfacts said. Approximately 2,200 mortgage deals are currently available.
The tremors in the market are down to a number of factors, including the Bank of England lifting the base rate, the big increase in government borrowing to lower energy bills through a new cap and the Chancellor's tax cutting mini-budget, which spooked the money markets.
All this pushed Bank of England governor Andrew Bailey to say that more rate hikes are on the way. The markets are now working on the fact that the base rate could rise to nearly 6% by next spring, meaning lenders have pulled cheaper deals that look unaffordable in the future.
For each 1 percentage point your mortgage rate increases, expect to pay roughly £50 more a month (£600/year) per £100,000 of mortgage debt.
Use our Mortgage Calculator to see your exact numbers.
If those rate predictions ring true (and the markets are not always right), without any further measures, that would likely push millions renewing when their fixes end into 'can't pay my mortgage' territory. The current situation is nearly unprecedented, changing fast and extremely uncertain. We do our best to guide you through some sensible moves below, but no one really knows what's coming next.
Note: This article was first published in our weekly email on Wednesday 28 September 2022 – the MoneySavingExpert.com team updated it on Thursday 6 October 2022.
How last month's base rate rise affects mortgages
The base rate decision is a trigger for lenders to start increasing loan rates, but whether it affects you now - or later - depends on the type of mortgage you have.
Got a tracker rate or variable mortgage? Even before further rises, the latest 0.5 percentage-point increase will see tracker rates go up roughly £25/month per £100,000 of outstanding mortgage - or £300 a year.
It's likely to be similar for those on other variable rates, but see our lender-by-lender rate increases for the announced changes and use our Mortgage Calculator to work out your exact new cost. We'll update this whenever there's a future increase to the base rate.
Got a fixed rate mortgage? There's no change to what you pay until the fix ends. Then you'll be moved on to a standard variable rate - typically 5% to 6% (but if rates rise again that'll go up too).
Or you can fix again - which is still likely to be cheaper - but still far, far more expensive than your current fix - after so many years of low rates. Here are the cheapest rates at the time of writing, though they're moving constantly...
|It's worth noting that 10-year fixed deals look much better value, because the current interest rate crisis is seen more as a short-to-medium term thing. So if you fancy a 10-year fix (in most cases that means you're pretty sure you won't move in that time), it's something to discuss with your broker (more on this later). For more on this, see our story on the pros and cons of 10-year mortgages.|
Should you act now? It's a tough call. Normally we'd caution against knee-jerk reactions on the back of what's happening in the financial markets. However, with rates being repriced constantly, if you are in the position where you are free to get a new mortgage (such as those coming to the end of a fix, or already on a standard variable rate), it's worth checking, and doing so immediately. Let's take you through what to do...
1. ON A VARIABLE OR TRACKER RATE? See if you can ditch, switch and save
Once you know your new mortgage rate following the base rate rise, check urgently to see if you can ditch, switch and save - and act quickly, as today's rates are currently being rapidly reviewed and increased. This is especially likely for those on standard variable rate (SVR) mortgages. Here's how:
1. Benchmark what type of rates are out there. Our mortgage comparison tool will help you see what's available currently and compare it against what you're paying now. Remember, rates are changing quickly, so you may need to check them again if you're ready to switch.
(Our comparison is updated at least once a day but remember, this is a fast moving situation, so we can't promise mortgages listed there will still be available even minutes later.)
2. Dig out the details of your current mortgage. If a saving looks possible, then dig out the details of your current mortgage, as it's time to get serious...
- What's the rate? Plus monthly payments & outstanding debt.
- What type is it? Is it a fix, tracker or SVR? See fixes vs variables.
- When's the intro deal over? For example, when does your fix end?
- When must it all be repaid? In 10, 20 or 25 years?
- Will you be penalised to switch deals? Does your fix or tracker have an early repayment charge? It's highly unlikely you'll find a better rate than you're currently on, but you might consider paying the charge if securing today's rate is important to you.
- What's the loan to value (LTV)? This is the proportion of the home's current value you borrow - for example, £280,000 borrowing on a home currently worth £350,000 is 80% LTV. Rates get cheaper the lower your LTV. See LTV help.
3. Check out your existing lender's cheapest deal. Getting a new deal with your existing lender is known as a 'product transfer'. See what rate it's offering online - or speak to a broker - and use this as a benchmark to beat (so back to the mortgage comparison to note down how it compares). Brokers are telling us that product transfers are becoming much more common, as it can be easier to get accepted, and may have lower fees.
4. If you've savings, use them to bag a cheaper deal. If you still owe more than 60% of your home's value on a mortgage, the more you can do to drop an LTV band, the cheaper your remortgage will be. The main bands where interest rates really drop are at 90%, 80%, 75% and 60%. If you've a lump sum put away, and it's not going to leave you without an emergency fund, putting some of your own money in at the point of remortgaging is well worth doing - especially if you're really close to the next band.
5. Check out the size of any possible savings on our mortgage calculators. Stick your digits in here...
6. Consider whether you want a fix or a tracker. The more you value certainty and being able to stick to a budget, the more you should hedge for a fix, and for fixing longer. Yet, trackers are likely to be cheaper right now, but will go up if base rate does - and there's potential for your repayments to change frequently if we continue to get consecutive increases to the base rate. See our full fixes vs trackers analysis for help to decide.
7. If you're thinking of applying, it's all about whether you'll be accepted. There are two big factors at play here...
- Affordability check. Lenders must carry out strict checks to see if you can afford mortgage repayments on top of all your other expenses. For most people, living expenses are going up, meaning acceptance can be harder.
But lenders don't just assess if you can afford to repay at current rates... they also 'stress test' how you'd cope if interest rates went up, so you'll need to have extra leeway in your finances. So, consider being more frugal in the run-up to a mortgage application. For full info on what you can do to ease acceptance, see 17 ways to boost mortgage chances.
- Credit check. A poor credit history can torpedo a remortgage application, or at least mean you don't qualify for the cheapest deals. So check your credit file (for free) to ensure there are no errors, then minimise other credit applications, and pay down debts if you can. See 36 tips to boost your creditworthiness.
8. If you're serious, speak to a broker - they're currently more important than ever. Lenders' acceptance criteria differ from one to the next, plus they're subject to change - something that's been at short notice in reaction to the cost of living crisis. For example, one lender might include overtime or commission in your income assessment, and another might only count your base salary.
To navigate the maze, we strongly suggest you use a mortgage broker. They do the 'finding a deal' work for you and have details of most lenders' acceptance criteria, which aren't easily obtainable by the public, plus many deals (even some product transfers) that can only be accessed via brokers. See our full help on how to find a good broker.
PS. A note on mortgage prisoners. If this situation is bad for most mortgage holders, it is a nightmare for the up to 200,000 mortgage holders – many still suffering the fallout of the 2008 financial crash - that are stuck paying expensive mortgages to companies that don't issue new mortgages.
We've been campaigning on this desperate issue for a number of years, and will continue, though the latest interest rate rises makes it far tougher. We do have a mortgage prisoners help guide and while it's likely to be slim pickings at the moment it is worth a look if you haven't already.
2. ON A FIXED RATE MORTGAGE? Check when it ends and remember to act 3 to 6 months ahead
Fixed rate deals typically last two, three or five years (a few may be longer). We're often surprised how many people don't know when theirs will end - and this isn't a good time for surprise. So make sure you know and note it down.
If you're coming towards the end of your deal, act NOW. Some lenders let you lock in a rate six months in advance - and many more let you lock in three months ahead. Full info in long lock-in mortgage help, but as a rule of thumb...
If your fix ends before March 2023, check deals now, as rates are likely to rise further, and today's rates may soon disappear.
Use the how to check if you should switch mortgage info above to go through what to do.
What if your fixed deal isn't ending soon, can you still switch? It's not surprising many are asking this question when rates are rocketing. The concept is 'should I ditch a little time on my current cheap fix, to lock in for longer and prevent hideous rises in future?'
On the surface it looks a sensible question, but there are a number of things to consider...
- Early repayment penalties: Ditching your fixed rate mortgage before it ends will normally result in an early repayment charge - something that can cost you £1,000s and, in normal times at least, make ditching a fix prohibitive.
- You're taking a bet on future rates: While it looks like they are going to be far, far higher in future, if there's anything the past few years has taught us, it's that unknown unknowns could flip that around at speed. There are no guarantees, and without a crystal ball, we don't know how much rates will rise by.
If this is something you're considering, we'd push you to speak to a mortgage broker, who'll can run you through the pros and cons to see if it's worth it.
3. Millions can save £10,000s overpaying. But for others, savings work out better.
Most lenders allow those in the middle of a fixed or variable deal to make mortgage overpayments, though this is normally capped, typically at 10% of the outstanding balance each year.
Overpaying means you clear the mortgage quicker, which means you pay less interest in total - and savings can be huge. For example, on a £150,000 mortgage at 5% (25-year term), overpay £100 monthly and you'd reduce interest by £23,000 and repay four years and six months earlier. Use our Mortgage overpayment calculator to check.
Plus, as overpaying means you'll owe less, you may be able to get a cheaper deal when you come to remortgage. The main bands where interest rates really drop are at 90%, 80%, 75% and 60%. So, if you overpay enough to drop to a lower band, it can be a big winner.
Yet overpaying isn't the right option for everyone...
Is it better to save or overpay a mortgage?
The very simple answer is if your mortgage rate is higher than the after-tax rate you earn on savings interest, then mathematically you're better off overpaying the mortgage.
With mortgage rates rising faster than savings, that's likely to be the case for more and more people. For a full explanation, see our Should I save or overpay my mortgage? guide. In brief:
- Taken out a mortgage recently? Rates are high, so it's here the benefit of overpaying is most likely.
- On an older fix? Your rate is likely still cheap, possibly below 2%, while the top savings rates are 2.5% easy-access or 4.15% for a year's fix. So, saving is likely to win. If so, put the money away UNTIL your mortgage fix ends (timing fixed savings to end then too is useful) and at that point, consider using it towards reducing your new likely-much-higher-rate mortgage.
Even where overpaying does win (and you can afford to do so), there are some important checks to make:
1. Do you have other more expensive debts (eg credit cards)? If so prioritise clearing them, see Overpay my debt?
2. Are there any early repayment penalties? Most people will be allowed to overpay a certain amount. Yet always check the rules - any penalties will usually kibosh the gain.
3. Do you have a sufficient emergency fund? Martin's rule of thumb is keep three to six months' worth of bills money (enough to pay all bills) put aside in case of emergency. Don't assume the fact you've overpaid means lenders will let you off arrears-free in future.
Decided to overpay? Ensure the overpayments reduce the capital you owe
Ask your lender to ensure any overpayment reduces your mortgage term each time. Otherwise, an overpayment might just lower future mortgage repayments, which means there's no interest gain.
Do note, this isn't the same as you shortening your mortgage term. That'd lock you in to future repayments; you want each overpayment to count as a one-off and have the term reduced accordingly. See Martin's Overpaying vs shortening term blog for more details on why overpaying each month normally wins.
4. EVER THOUGHT OF DOWNSIZING? Some may balk at the idea, but it could rid you of your loan
Inflation is a funny thing. When we talk about food inflation, petrol inflation, energy inflation - we hate it. Yet often property price inflation is celebrated.
However, while homeowners may feel rising prices make them feel secure, it's a bit meaningless until you come to sell (or you remortgage to use the equity in your home - that just means bigger debt though).
And even then if you're selling to upgrade, rising property prices mean you'll need to find more money to jump that gap.
So with the huge rise in prices in many parts of the UK, and mortgages getting more expensive, it's worth thinking if you're in the position to downsize. It's likely this will especially suit any empty-nesters whose kids are now independent adults - with big houses for few people.
We know some will balk at the mere idea, but it's just a thought.
5. GET HELP IF YOU'RE STRUGGLING TO PAY. Avoid missing repayments without first speaking to your lender
With the cost of living increasing, many homeowners are struggling to meet their mortgage repayments. Missing a mortgage payment is known as falling into 'arrears'. You want to try to avoid this as best you can, as it'll have a serious impact on your ability to get credit in future.
Full info on what wider support is out there in our Mortgage arrears guide, but in brief:
- Change the terms of your mortgage - you could agree with your lender to extend your mortgage term, so you have longer to pay off your debt, or switch to an interest-only mortgage to cut repayments. This might provide some relief, but will increase costs - full info in ways lenders can help.
- Get help with your mortgage repayments - if you're on certain benefits, such as universal credit, you may be able to claim support for mortgage interest.
- Get free, one-to-one debt-counselling help - the likes of Citizens Advice, StepChange or National Debtline can help you understand your options, and if you need emotional support, try CAP instead. You may also find the MSE Mental Health & Debt guide useful.