Worried about your mortgage? Our Q&A has all the answers
AS homeowners are being warned that mortgage bills could rise by £7,300 a year if interest rates hit 6%, we answer your questions.
Why have some lenders stopped offering mortgages?
Lenders have withdrawn mortgages because the cost of borrowing is expected to jump due to a weaker Pound and the rising cost of servicing government debt.
The Pound fell sharply in value after last week’s mini-Budget, which included £45billion of tax cuts to be paid for by additional borrowing.
The Bank of England yesterday gave a very strong signal it would raise interest rates to try to prevent the weaker Pound fuelling higher inflation.
So banks are pausing products while they re-price deals in expectation of these rate increases. The banks argue that given the volatility in the market they have to make sure they do not lose money by offering deals which will be rapidly out of date.
Companies that have halted some deals include Santander, Yorkshire Building Society, Virgin Money and Skipton. Nationwide has said it will raise rates on a range of fixed mortgages.
Will other lenders follow suit?
As many as 300 mortgage products have been withdrawn, with many fixed deals disappearing. It has also become harder for first-time buyers to get loans due to higher interest rates and tougher affordability checks.
Aren’t mortgage rates already on the up?
Yes, and some families are already struggling. The Bank of England has made seven interest rate rises since December, last week increasing the base rate by 0.5 per cent to 2.25 per cent.
This means that a tracker mortgage is already £210 a month more expensive on average than a year ago, and a standard variable rate is up by £132, according to UK Finance.
Today, the rates for a two-year fixed mortgage sit at 4.78 per cent, up from 2.38 per cent last year, according to MoneyFacts.
Around 1.8million customers are on fixed deals set to end in 2023, so huge numbers of new and existing mortgage holders will be hit.
How high could interest rates go?
The Bank of England told banks this week to stress test for a six per cent base rate — and markets have already started pricing in a high chance rates will hit this by spring 2023.
This would typically translate to a 7.5 per cent mortgage rate for homeowners.
Traders are pricing in a 1.5 per cent rise in interest rates at or before the next Bank of England meeting in November.
What will it mean for me?
For a homeowner with a £200,000 two-year fixed mortgage ending early next year, if the base rate rises to six per cent, then monthly payments will rise from £800 to £1,408 — meaning £7,296 more a year. If it’s a £300,000 mortgage, monthly payments will rise from £1,200 to £2,112 — meaning a £10,944 annual increase.
Those on variable or tracker mortgage deals will have already noticed a rise in rates. A homeowner on a £400,000 standard variable mortgage would see bills jump by £965 a month, or £11,580 a year, if rates hit six per cent.
Those on fixed deals will be protected from rate rises until their deal expires.
Should I refix my mortgage early?
If you’re on a fixed deal then you may consider leaving early — but you will have to factor in any early repayment charge. You can usually secure a fixed-rate mortgage six months before the end of your existing deal.
Nick Morrey, technical director at mortgage broker Coreco, says: “We have seen a marked increase in the number of borrowers looking to exit their deal early to get a new product before rates go much higher.
“They are prepared to pay significant early repayment charges to do this but it is not always a good idea.”
I’m thinking of buying a house – is now the right time?
Buying a home is always based on your individual circumstances. For example, if you need more room for a growing family.
Buying a property is a long-term investment. You’ll need to consider long-term affordability and now may not be the time to stretch yourself with a sizable mortgage that may become harder to pay as the cost of living rises.
If I’ve already agreed a mortgage in principle, can the lender rip it up?
Mortgage brokers typically say that once a mortgage in principle has been agreed, it’s rare for lenders to go back on it. The contract usually lasts for three to six months before it expires.
Nick says: “It has happened a few times in the past under different circumstances and on a pretty small scale, but it is really rare so we would expect all current applications to be honoured.
“The current turmoil is not being caused by funding issues, liquidity or even capacity. Lenders want to lend to carry on trading as a business.”
What is going to happen to the housing market?
High interest rates could be a big blow for demand as we have become accustomed to low interest rates and many of us do not have additional cash buffers.
Karen Noye, mortgage expert at Quilter financial advisers, says: “People simply won’t be able to afford their mortgage payments if they have over-stretched themselves. This could cause a wave of properties to come to market just when demand is drying up.
“House prices will naturally come down if this happens.”
However, many experts predict a reduction in house price growth — rather than a fall in overall prices.
Read More on The Sun
..AND PENSIONS & SAVINGS?
By Lynsey Barber
A PLUNGING Pound means pain for millions of pensioners and those saving for their pension.
It is likely to push up inflation, which will see higher prices eating up more of people’s incomes.
Helen Morrissey, from financial services company Hargreaves Lansdown, says: “A lower Pound pushes up the price of imported goods so we could see inflation remaining elevated for longer, which will squeeze budgets further.”
Meanwhile, state pension payments will not increase until April next year. Pension income from an annuity, which pays a guaranteed income for life, might be protected – but only if it is linked to inflation.
Anyone taking income directly from their pension pot could find they are using up more of it sooner.
Pension funds invested in the UK stock market will have fallen in value.
But when Sterling is weak, the value of overseas investments receives a boost when converted back into Sterling. So how much you win or lose depends on how your pension is invested.
Workers paying into their pension are also affected in the same way, but many will have time for the market to bounce back.
Steve Cameron, from financier Aegon, says: “It’s important to remember most people saving in a pension have many years until they will actually retire, so short-term dips should not be too great a concern.”
Most savers are automatically moved out of riskier investments the closer they get to retirement. Bonds are usually a safe haven but prices have collapsed now. So some people may see their pension values drop due to bond market volatility.
But anyone buying an annuity now could find better rates, as they are closely tied to gilt yields, which have shot up. Better annuity rates mean a higher income from your pension.
In good news for those with cash in the bank, interest rates could go up on savings accounts. But banks have been notoriously slow to pass on these rises.