INTEREST rates are on the rise, pushing up mortgage repayments for many homeowners.
Those on fixed deals are protected for now, but will likely face higher bills when looking for a new deal.
Homeowners are facing bigger mortgage bills
Millions of homeowners have a deal expiring in the next 12 months.
When they come to remortgage they will find mortgage rates are higher than when they previously fixed.
According to Moneyfacts, a typical two-year fixed mortgage rate was 2.52% in August 2021 but has risen to 3.95% today.
An average five-year fixed deal is now 4.08%, up from 2.75% a year ago.
The Bank of England hiked rates last week to 1.75% and is expected to make further interest rate rises, experts predict, as it tries to tackle rocketing inflation.
Many people face a dilemma: whether to wait for the term to end, or leave early and fix now before rates rise further – but pay a potentially hefty charge.
But a new calculator could help you work out which one is the most cost effective option.
Fixed deals let you lock in a rate for a set period of time, usually between two to five years.
You get peace of mind that you’ll pay back the same amount each month for the whole time.
But if you want to ditch the mortgage before the term ends you’ll usually pay an exit fee.
This can be in the thousands of pounds, depending on the size of your mortgage and your lender’s terms and conditions.
For some it could be worth paying the fee and locking in a new rate now, before the fix ends.
But for others, it might be worth waiting until the end of the term.
The tool from Nous, which is free to use, can help you work out the saving – or extra cost.
It takes into account how much you have left on your mortgage, the term remaining on the fixed deal, monthly repayments and the exit charge.
Greg Marsh, boss of Nous, said: “Many people took out these fixed deals when rates were very low.
“Nobody – including the Bank of England – forecast that they would rise so rapidly, and homeowners are facing a terrifying crunch on top of all the other cost-of-living increases.”
Remortgaging now versus waiting
Take a 25-year mortgage of £250,000 fixed in August last year at 2.52%.
You can compare the cost for remortgaging in August 2023 at the end of the two year term with a rate of 3.95%, versus paying the early fee now of £5,000 (2% of the outstanding balance) .
It shows that remortgaging now would leave you worse off by £529 after five years.
It’s worth noting that no one can be 100% certain what will happen with interest rates.
Although interest rates are expected to rise further according to economists, they could unexpectedly fall again.
For instance before Covid, the BoE was expected to continue increasing interest rates slowly, but it dropped to a record low of 0.1% in April 2020 when the pandemic hit.
The tool lets you choose what assumptions it makes about interest rates – whether you go with market estimates (what experts think will happen), or are more optimistic or pessimistic about rates.
In our example, we used market estimates, and it also takes into account an £800 mortgage fee.
But if you were more optimistic and think rates might not go higher than 3.95%, you’d be better of waiting too.
Remortgaging now in this scenario would leave you £1,216 worse off after five years.
Don’t forget that if remortgaging now were the better option, you would need to have access to the cash needed to pay for the early exit fee, for instance from savings.
How to get the best deal on your mortgage
It’s also worth noting that the calculator is just an indication, and that a mortgage adviser, broker or your lender will have a fuller picture of your borrowing, situation and rates available.
For instance when remortgaging you might have a change in the loan-to-value (LTV) that gives you access to better rates.
A change to your credit score or a better salary could also help you access better rates.
But the calculator could help you understand if it’s worth exploring a remortgage now to save cash.
If you’re on a fixed deal you might be able to lock in a new rate now, up to six months before your current rate ends – and you won’t have to pay an exit fee.
Many wait until their existing loan has run its course before signing up to a new offer – but that could cost you more if you wait, as rates can rise between now and then.
When you come to the end of a fixed term, you’ll usually revert to the lenders standard rates and these are usually higher than fixed deals.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also got to a mortgage broker who can compare for you, but you may have to pay for this service.
It could cost a couple of hundred pounds but it might save you thousands on you mortgage overall.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
Or you can add it on to the cost of the mortgage, but beware that means you’ll pay interest on it and so will cost more in the long term.
Meanwhile lenders are being inundated with remortgage applications and four lenders have stopped processing them.