MILLIONS of households could be hit by a mortgage “ticking timebomb” that could explode next year as their fixed-rate deals end.
Interest rates are already at a 14-year high of 1.75 per cent – and are expected to rise further this year.
Cheaper mortgage deals are disappearing and homeowners are being encouraged to shop around now
Those on variable or tracker mortgage deals have already noticed an increase in rates, as they are linked to the Bank of England’s base rate.
But around 1.8million fixed deals are set to end in 2023, according to UK Finance.
Cheaper mortgage deals are disappearing, with the average two-year fixed now 4.24 per cent, up 2.75 percentage points last year.
Lucy Alderson investigates what homeowners should do, as some consider ditching fixed-rate deals early.
Who should fix early?
HOMEOWNERS are usually warned about exiting a mortgage deal early.
Lenders charge up to five per cent on the remaining balance to end a deal.
On a five-year fixed mortgage of £150,000, which had one year remaining, it would cost £1,500 to pay a one per cent early repayment charge.
However, there is a way to avoid the fee entirely.
Nicholas Mendes, mortgage technician director at broker John Charcol, said: “If you are looking at your fixed-rate mortgage which has six months left, and don’t want to pay an early repayment charge to switch to a new rate now, you can fix a deal six months in advance with most lenders.”
It means if interest rates go up between now and when the deal ends, you won’t be affected as you have locked in your rate.
If rates go down — although this seems unlikely — then you can ditch the rate you have locked into and shop around for a lower one.
“It’s a win-win in any outcome,” Mr Mendes said.
But this won’t help homeowners whose deals are set to end beyond six months’ time.
For example, borrowers whose deals end in September next year will be the “worst affected” by rate rises, with costs expected to soar by £163 a month on average, according to Capital Economics.
Homeowners will need to crunch the numbers on whether it’s cost-effective to gamble and fix now, even factoring in any early repayment charges.
Use a calculator like one offered by Nous, the cost of living website, which helps you work out if it’s cost-effective to refix early.
Most lenders allow homeowners to fix a deal six months in advance of their deal expiring
How do you work it out?
FIRST, borrowers need to know exactly what their lender will charge them to exit early.
The bank should be able to provide a redemption statement in this case, which details information about your loan, including a breakdown of any early repayment charges.
Then customers should shop around for deals by using a mortgage comparison site such as Compare The Market or Uswitch, or speak to a broker.
Look for a whole-of-market broker, as some only recommend loans from a selection of lenders, not all of them.
When you have found the best deal currently available, do a few sums.
You will need to factor in the fee for arranging your mortgage too.
Look at what your monthly payments would be on this deal if rates are one to two percentage points higher — which is the amount experts think rates could rise by.
If you would still be paying less, factoring in the early repayment charge and other fees, then it’s worth looking into switching.
Is it worth it?
YOU are not guaranteed to save money as no one can say for certain what will happen to rates.
It means you could be thousands out of pocket if your gamble of fixing now doesn’t pay off.
Nick Morrey, of mortgage broker Coreco, said: “The problem is the cost of fixing now is definite, but the savings are probable and not guaranteed.”
Households will also need to have the money to cover early repayment charges upfront.
But as the cost of living has ravaged many families’ savings already, customers may not have — or want to sacrifice — thousands of pounds.
Yorkshire Building Society director of mortgages Ben Merritt thinks it’s best to seek professional advice before making any decision.
He said: “It’s now more important than ever for people to seek advice from a qualified advisor to find the best solution based on their individual circumstances.
“Remortgaging generally carries other costs including product fees, legal costs and valuation fees which need to be factored in too.”
Another option could be to overpay on your mortgage now.
This means that when your deal ends and rates will have gone up, you’ll have a smaller balance to repay interest on, which will lower your interest repayments.
It could be an idea to save your cash that would have gone towards paying off the early repayment charge to paying off your mortgage quicker.
Charcol’s Mr Mendes said: “You can typically do this by increasing your monthly direct debit or make lump sum payments.”
But some mortgages have a limit on what you can overpay — typically ten per cent of the value of the outstanding loan per year, but it can vary.
‘I’ll overpay to lower interest’
PROPERTY manager Sarah Chapman is worried about rising mortgage rates – but doesn’t think the £1,800 early repayment charge is worth paying.
Sarah Chapman says she will wait and and gamble that interest rates will fall in 12 months time
The 35-year-old lives in Ipswich with her husband Stewart, 37, an insurance claims handler, and their children Joseph, six, and Ethan and Oliver, both three.
They signed a five-year fixed deal at 2.14 per cent in 2018 for their three- bedroom home, which ends in October next year.
While interest rates were at a record low last year, Sarah started seriously considering exiting her deal early.
She now pays £505 a month and says the cheapest deal she has found is a five-year fixed rate at 3.33 per cent, which would be £562, plus the £1,800 early repayment charge.
She said: “I don’t want to pay £1,800 now, plus £60 more a month now on my mortgage.
“It would be worrying to pay when everything else is going up and wages are staying the same.
“I’m hedging my bets on interest rates peaking, then falling before October next year, when my deal ends.”
Instead of fixing now, she plans to overpay on her mortgage and said: “By October, our balance will therefore have reduced and we’ll be paying less interest.”
‘I cleared savings for new deal’
MUM-OF-TWO Lydia Joseph emptied her kids’ savings account to swap mortgages on their four-bed house.
Lydia Joseph has spent her savings to secure a lower mortgage rae
Lydia, 34, who lives in Faversham, Kent, thinks she’ll be better off in the long run, even though she had to pay a whopping £12,400 early repayment charge.
She took £6,500 from the savings accounts of Louis, eight, and Ines, six, while husband Paul, 42, a freelance writer, added the remaining £5,900 from his personal savings account, which he uses to save for his pension.
“It’s a huge sacrifice,” said Lydia, who works for a research company.
“That’s my kids’ college money – and it’s a gamble. But based on what I’ve been reading, I think it will pay off.”
She used online budgeting service Nous to work out if she would be better or worse off fixing early.
They were on a three-year fixed rate mortgage at 2.08 per cent with Barclays – paying £1,713 a month – which was due to end in April next year.
They asked Barclays for its best current deal that they could lock in with now. It was a fixed rate of 2.7 per cent for seven years.
Lydia swapped to the new deal, despite the big charge.
“I have peace of mind for seven years – I know what I’m paying and I know that won’t go up.”