The cheap mortgage party is over and like all great parties is unlikely to be repeated. What’s more, all of us mortgage holders face the dreaded morning after hangover.
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The cheap mortgage party is over and like all great parties is unlikely to be repeated. What’s more, all of us mortgage holders face the dreaded morning after hangover. Whether this year or next; or even a few years from now, the low-rate fixed deals we took for granted are probably gone.
So, how best to deal with the looming impact? In recent weeks, I’ve had so many people ask ‘should I switch rates now and pay the early redemption penalty?’ I’m afraid it’s too late for this, the rates have already doubled (and more). And, whilst they may well continue to increase it’s unlikely you will benefit by more than the exit penalty.
Like any market related volatility, mortgage rates do swing like a pendulum, going up too high before finally settling down, which is why you need to hang on to your current rate.
This is one party where you want to hold out to the bitter end.
Historically, mortgage rates have settled at around 4-5% and this is where they are likely to end up again in the next few years. However, in my opinion hitting 8% in the short term is not impossible.
But what can you do in the meantime? After last month’s exodus, lenders are thankfully returning to the market. We can secure you a new mortgage up to six months before your current deal ends. By securing a rate early you’ll be protected from additional rate increases. And, if by some miracle the rates start to decrease you can always drop this secured rate at a later date and select a new one.
Over the years, many people have kept debt ratios high and used the money to invest elsewhere as the returns on investments have outpaced mortgage rates. This will now be much more difficult, especially for lower risk and non-pension investments.
The majority of lenders allow overpayments of 10% per annum, even when in a fix rate deal. If you still have three or four years left on your lower rate mortgage, it’s worth investigating what your potential new monthly cost will be. If possible, start making this extra payment now, or at least some of it, to reduce your overall mortgage balance before the interest rate hike. This will reduce the actual increase you are likely to face.
If you are lucky enough to have a shorter-term mortgage, say under twelve years, the rate change will have a much more muted impact. At these late stages in a capital repayment loan the majority of your monthly payment is capital rather than interest so you may not see the massive increases you were expecting.
Whatever your situation, if you think increased mortgage payments will be financially difficult you can look to extend your overall mortgage term. The majority of lenders will allow this up to (and maybe even beyond) retirement age. Bear in mind, this should always be a last resort! If you think this could be the case speak to us as soon as possible, so we can help you make a plan. Don’t wait until your fix rate ends.
Finally, whilst everyone’s situation is different, industry experts expect rates to peak in 2024 and then settle down again to a more sustainable level which suggest that when the time does come to refix your mortgage you it may be sensible to fix for just two or three years so you can then refix again at what will hopefully be a more stable time!
If you have any questions on any of the points raised, please get in touch with the Ginkgo advice team and we will give you detailed and individual advice to assist you in these volatile times.
By Daren Wallbank
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 26/10/2022
Your home may be repossessed if you do not keep up repayments on your mortgage.
