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How to prepare for a mortgage shock and get a better rate

Hit hard: Homeowners face rate hikes costing them hundreds of pounds

Hit hard: Homeowners face rate hikes costing them hundreds of pounds

Mortgage rates are rising at a record pace, putting homeowners at risk for annual payments hundreds of pounds higher than in years past.

The average two-year fixed-rate agreement is now at a nine-year high, 1.4 percentage points higher than in December last year, according to interest rate reviewer Moneyfacts.

But there are steps borrowers can take to avoid the steepest hikes.

What’s up with the interest?

The Bank of England has raised interest rates in a bid to curb rising inflation.

The key interest rate rose from 0.1 percent in November to 1.25 percent today and is likely to rise again this week. Lenders pass these increases on to customers.

Take, for example, someone with a two-year mortgage of € 200,000 that they took out in the summer of 2020.

If they made the best deal available at the time, they would pay 1.09 percent interest. But if they take out a mortgage again, the best equivalent rate will have risen to 2.79 per cent, raising their repayment costs by £1,152 a year.

This is money Mortgage Comparison Calculator powered by broker L&C can help you calculate how much your monthly payments would increase and list the loans you could potentially apply for, based on the value of your home and mortgage size.

What to do – set your rate now

If you have a floating rate mortgage, arrange it now to protect yourself from future interest rate hikes.

Someone with a £200,000 mortgage where interest rates follow the base rate would have seen repayments rise by more than £100 a month since interest rates started rising late last year.

If you already have a firm deal, plan ahead so you’re ready to lock in the best price when it expires.

Laura Suter, head of personal finance at investment platform AJ Bell, says: “Most borrowers have a fixed-income deal, so they are protected from interest rate hikes until now.

“The big shock, however, will come when their deal is done and they re-mortgage – then they will face the full effect of all the recent rate hikes in one sitting.”

Start researching remortgage deals a few months before your current one expires. Most mortgage offers are valid for six months, so if you need to refinance before January 2023, you may be able to close a new deal at current rates.

If the rates are lower when it’s time to switch, you can ditch the rate you booked in advance and go for a cheaper deal.

You can also check your credit score to make sure you qualify for the best possible mortgage rate.

Do it early and you’ll have time to improve it if necessary, for example by putting yourself on the electoral roll or challenging mistakes.

Consider a green mortgage

Some lenders offer better rates if your home is energy efficient. Virgin Money, NatWest and Barclays offer a competitive rate if your home has an excellent energy performance certificate – A or B.

Green mortgages are growing in popularity — Internet searches for these products have quadrupled in a year, according to mortgage technology company Twenty7Tec.

While green mortgage rates are usually lower than average, they aren’t necessarily the cheapest available, so it still pays to compare prices.

Virgin, for example, offers a five-year, greener, fixed-rate mortgage of 3.49 percent with £300 cash back. The best solution for five years on the market is 2.78 percent from Ulster Bank, part of Royal Bank of Scotland.

Paying too much – and then getting a cheaper loan

Reducing your mortgage debt by overpaying makes financial sense.

David Hollingworth, associate director at L&C Mortgages, says, “Borrowers who still enjoy low mortgage rates can now overpay to erode their balance faster and leave them with a smaller mortgage when their current deal ends.”

By overpaying, you can lower your loan-to-value ratio — the loan as a percentage of the home’s value — and make loans available at lower rates.

Take, for example, someone with a house worth $283,000. If they had a loan-to-value of more than 65 percent, they could get a five-year fixed rate of 3.22 percent from NatWest with monthly payments of £925.

But if they overpaid so that the loan-to-value was 60 percent, they could access a lower five-year fixed rate of 3.16 percent from HSBC, with repayments of £819 a month. Over the full term, they would save £31,699 in interest payments.

How to transfer?

Time flies and with Britain’s favorite fixed-rate mortgages of two and five years, many homeowners are finding their deal is up and it’s time to refinance faster than they think.

At that point, it’s time to dive back into a mortgage world that many of us know little about – and with interest rates rising, it’s important to make sure you’re getting the right mortgage interest deduction and moving toward the best new fixed-rate or other deal possible. .

Read our guide on take out a remortgage and find the best interest rate? to find out what you need to know.

Consider switching deals early

Most fixed and low-rate mortgages have an early redemption fee, making it prohibitively expensive to switch before a deal expires.

However, if you’re not far from the end of your current deal, it might be worth checking the numbers to see if it’s worth leaving early.

If you’re having trouble weighing the numbers, a real estate agent may be able to help.

Angela Kerr, director at HomeOwners Alliance – an organization that provides practical advice to homebuyers and sellers – says: “Tell the real estate agent what deal you have now, what the early repayments are, and they can see if it still makes financial sense to move on now. to step in before higher rates are introduced.’

The number of borrowers paying early repayment fees has soared this year. For example, the Yorkshire Building Society has seen an 88 percent increase in the value of fees paid by its borrowers this year compared to the same period in 2021.

Extend your mortgage term

If you struggle with monthly payments, extending your mortgage term will bring it down.

However, the longer it takes you to repay, the more interest you pay. For example, if you had a £200,000 mortgage at three percent, your monthly payments would be £948 over 25 years or £843 over 30 years.

However, you would pay a total of £19,000 extra in interest if you opted for the longer term.

You can also consider paying off all or part of an amortization mortgage.

For example, if you owe $200,000 on an amortizing mortgage with a three percent interest rate, your monthly repayment would be $948.

If you were to switch to paying off only, the monthly payments would drop to £500. However, you do need to have a plan for how you are going to pay off the mortgage in the future.

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