Everything is costing more – but your mortgage doesn’t have to.
If you were hoping for things to get better in 2022, then you’re probably feeling as disappointed and troubled as we are. The cost of living has gone up dramatically in the last few months. Inflation – the measure of how prices increase over time – is currently at 7%, the highest it’s been in the past 30 years. It seems that wherever you look, things have gone up:
- Energy bills. The energy price cap – the maximum price energy suppliers can charge – went up in April. Energy companies can now increase their bills by 54%. Right now, a customer on a standard energy tariff can expect to see the cost of gas and electric increase by an average of £693 a year. Those on prepayment meters can expect to see a rise of £708. The energy price cap is reviewed every 6 months, and it’s expected to rise yet again in October.
- Food prices. Disruptions to supply chains, a rise in the price of raw materials, and the conflict in Ukraine have all contributed to an increase in food prices. According to research company Kantar, food bills could increase by an average of £271 per year. Grocery prices are now 5.9% more expensive than they were at this time last year.
- Fuel costs. The price of petrol went up by 12.6 pence per litre between February and March, which was the largest monthly rise since records began 32 years ago. Diesel went up by 18.8 pence during the same period. This has meant that for many people, just getting to work is costing a lot more – which is a bitter pill to swallow when you consider that the average increase in wages isn’t keeping up with the rise of inflation.
- Retail and hospitality. Retailers like Primark and Next have said that it is likely they’ll have to increase the cost of their goods and products. Pubs, cafes and restaurants have also indicated that they will have to put up their prices, due to the increase in VAT, which has gone back to the standard rate of 20%, having been reduced to 12.5% during the pandemic for the hospitality and tourism sectors. Even simple pleasures, like treating yourself to a new top or pair of jeans, or having coffee and cake with friends, is going to start costing you more.
With these increases coming in at us from all angles, it looks like we’re all going to feel the pinch in the coming months. And it’s a sad fact that the many households who are already struggling will find things getting even worse.
The Bank of England is attempting to control inflation by raising the base rate, as when interest rates are higher, people are encouraged to spend and borrow less, which can help keep prices down. The Bank recently raised the base rate to 0.75%, the highest it’s been since March 2020. The Monetary Policy Committee, the group of economists who decide on whether to raise or lower the base rate, are due to meet again in May, and some reports are suggesting that they could raise the base rate yet again.
As a homeowner, the increase in the base rate could mean an increase in mortgage rates, and therefore an increase in your monthly payments. No one has a crystal ball and can say with certainty what will happen, but some in the industry believe that it’s a case of when, not if, mortgage rates will increase.
You won’t immediately be affected if you’re on a fixed rate deal, but an increase in rates might mean that the kind of low rate mortgages we’ve seen over the past decade might not be available in the future. The overall rise in living costs could also prompt lenders to tighten their criteria, which could mean that future customers won’t be able to borrow as much, or might not even qualify for certain products.
So, if you’re a homeowner, then now might be a good time to review your mortgage, and make sure you’ve got the best deal, before rates go up.
You should certainly be looking at a remortgage if you’re coming to the end of your current fixed or introductory rate – moving on to a standard variable rate could see your monthly payments jump up significantly. According to research done by UK Finance, 74% of mortgage borrowers are on fixed rate deals, with 1.5 million of them due to end this year, and another 1.5 million due to end in 2023.
There are a remaining 850,000 borrowers with tracker mortgages, and another 1.1 million customers with standard variable rate mortgages. Both of these customers will see their payments increase due to change in the Bank of England’s base rate – according to UK Finance, the average tracker customer could see their monthly payments increase by nearly £26. A customer on a typical standard variable rate could pay nearly £16 more each month. When you take into account the cost increases of everything else, a rise in your mortgage payments can have a significant financial impact.
But what if you’re not coming to the end of your current deal and remortgaging would mean paying an exit fee or early repayment charge?
Depending on how long is left on your current deal, an early repayment charge can add up to thousands of pounds. But a remortgage onto a better rate can save you hundreds each month, so in certain circumstances, it can be worth it. Sometimes your payments for the new mortgage can mean that you’re saving a significant amount of money each month, which outweighs any early repayment fees you paid.
It all depends on your circumstances, the cost of any exit fees, what you want to achieve, and the mortgage that would be available to you. It’s something that’s best discussed on a case-by-case basis with a qualified adviser – they’ll look at your situation, the costs and the benefits, and make an assessment as to whether it’s worth it.
As well as the potential rise in mortgage rates, another reason to review your mortgage is the overall increase in property values. House prices soared during the pandemic. Although this surge is expected to slow, houses prices are still predicted to rise over the next five years, according to the Office for Budget Responsibility. A valuation might reveal that you have more equity than you think. As a result, you may have moved into a lower Loan to Value bracket, which means you could qualify for better rates, which in turn could mean cheaper monthly payments.
There are a few things you can do to improve your chances of getting a mortgage:
- Check your credit file. Having a good credit score and a clean credit profile will improve your chances of getting a new mortgage, and the best available deals. You should check your file to make sure that everything is as it should be. If something isn’t right, you should notify the credit reference agencies and the creditor involved, to get it corrected. You should make sure that any payments you make to your credit accounts are up to date, and close off any accounts that are no longer in use. You should also make sure you’re on the electoral roll.
- Manage your budget. Lenders will want to make sure that any new mortgage is affordable – especially given the rise in the cost of living – and to do that, they will assess your outgoings. Prior to making an application, it’s a good idea to do some financial housekeeping and review your budget and your spending habits. That might mean cancelling unnecessary subscriptions, making an effort to stay out of your overdraft, and resisting the urge to make impulse purchases. The lender will want to see that you are living within your means.
- Lower your debt to income ratio. When it comes to applying for a mortgage, the lower your debt to income ratio, the better. Avoid using your credit cards to their limits, and avoid taking out loans or opening new credit accounts prior to your mortgage application. If you’re finding that you’re having difficulty managing your credit card or loan payments, then it might worth thinking about consolidating problems debts with the new mortgage.
You can find out more about working out your budget, making cutbacks, improving your credit profile, and things to consider when dealing with problem debt here.
Something else you can do to make sure you get the best mortgage deal available, is get in touch with us at Dragon Finance and speak to one of our advisers. As we’re a whole of market broker, we have access to a range of banks, building societies and specialist lenders, so we’re not restricted to one particular lender’s products – meaning you get more options.
We’ll also look at more than just finding you a better mortgage rate. You might want to raise some extra money while rates are still low, to complete a home improvements project. Or you might want to consolidate some debt and reduce your outgoings to give you some breathing space in light of the increased costs. Whatever it is, we’ll find you the right solution to help you face the challenging times we all have ahead.