Mortgage expert shares ‘key’ tips to choosing a deal as rates hit 15-year high

Mortgage expert shares ‘key’ tips to choosing a deal as rates hit 15-year high Mortgage rates have now reached the highest level in 15 years as lenders continue to grapple with the Bank of England’s rising Base Rate and inflationary pressures. Following the Bank of England’s 13th Base Rate rise to five percent, the typical two-year fixed-rate mortgage deal on the market reached 6.66 percent on Tuesday, up from 6.63 percent on Monday, Moneyfactscompare.co.uk said. The last time two-year rates were higher was in August 2008. Moneyfacts’ figures also show that the average five-year mortgage rate on Tuesday was 6.17 percent. Describing the current landscape as ‘the worst mortgage squeeze since the housing crash of the early 1990s’, Alice Haine, personal finance analyst at Bestinvest, said: ‘While the average fixed rate was significantly higher at around 13 percent in 1990 – the size of the loans households take on today relative to their incomes is much bigger. This is why the mortgage shock feels very real for many.’ Not everyone is affected equally as the impact of raised interest rates depends on a variety of factors, such as a person’s loan-to-value ratio, the length of the mortgage term, the mortgage rate applied and whether they are locked into a fixed or variable rate deal. But with rates on the incline, first-time buyers and homeowners looking to refinance may be considering their options and Ms Haine has outlined a few – as well as what the Base Rate could mean for each. Borrowers on tracker rates will be feeling the most pain Borrowers on variable mortgages, where rates are more closely aligned to the Bank of England’s (BoE) Base Rate will be feeling the most pain, Ms Haine has said. There are three types of variable rate categories, and these include trackers, Standard Variable Rates (SVRs) and discounts. Ms Haine said: ‘Tracker mortgages, which are directly tied to the BoE’s Base Rate, are causing the biggest headache as borrowers receive an instant hit to their finances every time interest rates increase. These products are great when interest rates are falling, but not when they are rising.’ Ms Haine said that while switching from a tracker deal can incur an exit penalty, it might be ‘worth it’ if a better fixed-rate deal can be secured. However, she suggested doing the calculations carefully, especially now average rates are exceeding six percent. Those on a standard variable rate (SVR) – the default mortgage that borrowers move onto after finishing an introductory fixed, tracker or discounted deal – could also see their repayments rise in line with a Base Rate hike if the lender passes it on. The Bank of England Base Rate hit five percent in June 2023 Ms Haine said: ‘SVR mortgages are typically the most expensive, with average rates now hovering above the 7.5 percent mark and some products significantly higher. Anyone on an SVR should consider switching to a fixed rate deal, if possible, to lower their repayments, while anyone whose fixed product is expiring soon should look to line up their next mortgage as soon as possible to avoid ending up on their lender’s SVR.’ Ms Haine said the ‘one benefit’ of an SVR is that there is typically no early repayment charge, meaning the mortgage can be paid back in full at any point without a penalty fee. She said: ‘If you know you will have the funds to clear the mortgage in the next few months, then it might be worthwhile sticking with the higher rate.’ Ms Haine said Base Rate rises can even impact those locked into a discounted mortgage – a variable mortgage with a discount on the lender’s SVR for a fixed period – if the lender decides to pass it on. Ms Haine said: ‘Discounts tend to apply for shorter periods of two or three years, but take note – different lenders have different SVRs, therefore it is not always the size of the discount that is key but sometimes the underlying rate.’ SUBSCRIBE Invalid email We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info Fixed rates offer certainty but no relief from higher repayments Opting for a variable or fixed-rate deal is the question many are deliberating over at the moment, and the answer boils down to individual finances and the risk people are willing to take. Ms Haine said: ‘Benchmark interest rates are expected to rise further from here before possibly falling next year and a fixed rate offers protection against future rate hikes and certainty over what you need to pay every month. ‘Someone whose finances are very tight should avoid the risk that comes with a variable mortgage in the short term, but those with spare cash may want to take a gamble on a discount or tracker if they think it might work out cheaper in the long run if interest rates really do fall in the next year or two.’ Borrowers nearing the end of a fixed-rate deal can lock in a new deal up to six months ahead with any lender under new measures set out by the Government’s new Mortgage Charter. Trending