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Mortgage Interest Rates – What’s Going On?

So far, 2024 isn’t looking great for home owners and people looking to get their first mortgage.

Inflation is still higher than the Bank of England’s target of 2%, and as a result the Bank has held the base rate at 5.25%, the highest it’s been for 15 years. The Governor of the Bank of England, Andrew Bailey, doesn’t expect the base rate to come down any time soon, not with inflation remaining so high.

As a result of the base rate, the cost of mortgage borrowing is still high. According to Moneyfacts, the price of the average 2 year fix is 5.78%, with the average 5 year fix coming in at 5.35%.

This means that many people –  whose mortgages have rates of around 2%  – will likely face a huge payment shock when their deals come to an end.

1. How many customers will be affected?

According to the Financial Conduct Authority, there are approximately 1.4 million mortgage deals that will come to an end in 2024, meaning that those customers will see their monthly payments increase by at least £200, and anything up to £1000 when they remortgage onto new deals.

The Bank of England’s Financial Stability report revealed that roughly 900,000 customers would see their monthly payments rise by £500 when they leave their current fixed rate deals. And approximately 180,000 of those customers could see their monthly payments rise by £1000.

2. Will interest rates come down?

Although it is expected that the Bank of England base rate will fall later in the year, exactly when is up for debate. Some say it might happen this month, when the Bank’s Monetary Policy Committee meets on 21 March. Others say it won’t happen until February 2025.

Most mortgage brokers, lenders, economists and industry trade bodies don’t expect things to improve until the end of 2024 at the earliest.

So, whichever way you look at it, it doesn’t look as if mortgage rates will be coming down any time soon.

3. Is this the new normal?

The fact is that the low rates we’ve grown accustomed to over the past decade were unusual – for the longest time, rates of 5% and higher were the norm.

It’s a hard pill to swallow, but we might just have to accept that high rates are here to stay, at least for the foreseeable future.

So what does that mean to you, if you’re a first-time buyer looking to make a purchase, or a home owner looking to remortgage?

4. Fixed Rate vs Standard Variable.

Firstly, having a fixed rate mortgage is going to be significantly cheaper than taking out a Standard Variable Rate (SVR) mortgage. According to Moneyfacts, the average SVR is around 8.19%.

And given the uncertainty around interest rates and the ongoing cost of living crisis, the stability that a fixed rate offers can be a great benefit to many customers.

And don’t forget that the average rates we mentioned above are just that – averages. The average figures take everything into account, from the cheapest prime mortgages to the most expensive mortgages catering to customers with significant bad credit.

5. What rate will I qualify for?

The rate you will qualify for depends on a variety of different factors and your personal circumstances.

The cheapest deals will generally be available if you:

  • Are not borrowing as much.
  • Have a larger deposit to make your purchase.
  • Have more equity in your current property.
  • Have a good credit profile.
  • Are seen as less of a risk to the lender.

You’re likely to be offered a higher rate if you:

  • Are borrowing more or have a high Loan to Value.
  • Have a poor credit profile – such as a history of missed payments, defaults, County Court Judgements (CCJs), an existing Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).
  • Are seen as a higher risk to the lender.

6. A broker is your best bet.

With these factors in mind, the best thing you can do to increase your chances of getting the best mortgage deal, is to speak to a broker.

A whole of market mortgage broker will be able to find a wider range of mortgage deals than a high street bank or a broker who is tied to a particular lending panel.

A broker can help you plan and help reduce the impact of moving on to a higher rate.

If your mortgage deal is due to end this year, it’s best to start looking for a new one as soon as possible.

Most lenders will offer you a new deal up to 6 months before your current deal comes to an end, but you’re under no obligation to proceed.

So, if you find a rate you like, you can lock it in now, and then in 6 months’ time, if rates have dropped, shop around for a cheaper deal.

It’s also important to remember that the rate is only one piece of the puzzle, when it comes to getting the mortgage that’s right for you. It can be easy to obsess about rates, especially if you’re about to come off a 2% mortgage! And of course, the rate is an important factor when it comes to shopping around.

But perhaps the most important factor to consider, in today’s cost of living crisis, is whether the mortgage is affordable and how the mortgage fits into your monthly budget.

7. How long should I fix for?

Given the uncertainty about interest rates, this is perhaps the question that everyone looking for a mortgage is asking themselves.

The answer is outside the scope of this blog – it’s something that will depend on you, your circumstances and your goals, and can only be fully explored through a conversation with a qualified adviser, who will then be able to give you a personalised recommendation.

As a general approach, it might be an idea to fix for 2 years, so you can benefit from the security and stability that a fixed rate product provides, after which time you can remortgage again when rates have (hopefully) come down.

8. What if I’m already feeling the strain?

If you’re already feeling the pinch due to the cost of living, and are worried that moving to a higher mortgage rate might make things more difficult, there are some things you can do.

The first thing to do is to review your household budget and make cutbacks where you can.

Are there any entertainment subscriptions you are no longer using, or are not using enough to justify the monthly payments? Can you shop around for new providers or move onto a better deal? Can you swap utility and energy providers?

This is often easier said than done, and with high costs of food, energy and other basic items, many people have already cut things back as much as they possibly can.

If you’re feeling the strain because of debt, then as a home owner, you could access one of the most effective methods of reducing your monthly outgoings – a debt consolidation loan.

If you have credit cards, personal loans, or store cards and you’re finding that the monthly payments to these debts are eating up a considerable chunk of your income, then taking out a debt consolidation loan might be the right thing for you.

Debt consolidation can reduce your monthly outgoings significantly and simplify your finances prior to applying for a remortgage. This is usually done by taking out a second charge mortgage.

In some cases, you can consolidate your debt within a remortgage.

9. I’m worried about my credit profile – what should I do?

If you’re concerned about your credit profile, the first thing to do is check your credit file. If there are loans or credit cards you don’t recognise, or anything else that you believe is incorrect, then you can report it to the credit reference agencies to have the item amended or removed.

Bring any late payments up to date, and if you have any adverse credit, such as defaults or CCJs, you should think about paying them off. They will remain on your credit file for 6 years, but lenders can sometimes have a more positive view on adverse credit if you’ve paid it off.

There are some other steps you can take to improve your overall score:

  • Make sure you pay your monthly payments on time.
  • If possible, pay off your credit card balance in full every month.
  • Reduce your credit utilisation by keeping your credit card balance under 50% of your credit limit. The lower your credit utilisation, the better.
  • Avoid taking out any pay day loans.
  • Make sure you’re on the Electoral Roll.

If you do have bad credit, there are still mortgages and secured loans available, and it’s important to speak to a whole of market broker who can give you the right advice.

10. Speak to us.

If you’re coming to the end of your mortgage deal and are looking for a new one, are considering debt consolidation, or looking to get your first mortgage, give us a call and one of our qualified whole of market mortgage brokers will be happy to talk to you about your options.