An estimated 350,000 UK households who locked in rock-bottom five-year mortgage deals in winter 2020 face sky-high rates when they come to renew in the coming months, new analysis shows.
Phillipa Jackson, Operations Director at Purplebricks Mortgages, warns homeowners braced for a bruising to ‘act early’ to reduce the impact of an impending hit to their monthly finances.
Why will so many people be hit by a jump in mortgage rates?
The spike in mortgage approvals over this period is partly due to former Tory PM Rishi Sunak’s stamp duty holiday, introduced in July 2020, and brought to an in June 2021.
The stamp duty holiday was introduced to help buyers who might have taken a financial hit due to covid. It was also intended to boost the struggling property market beset by lockdowns.
This, combined with a pent-up demand after the first lockdown and the covid ‘race for space’ – when thousands of families upsized their homes – encouraged a stampede for mortgage approvals towards the end of 2020.
What will the increased mortgage rate be?
Analysis by smart money-saving assistant Nous.co reveals that 350,000 households took out five-year mortgages from October to December 2020, at a typical rate of 1.88%.
Close to half (48%) of all mortgage applicants over this period opted for a five-year fix, seemingly believing this would be the most advantageous for them.
Now these deals are coming to an end and thousands of families will be forced to remortgage at rates of 5% on average.
For a household with a typical £200,000 mortgage, this means their payments will rise by £333 a month, or £3,997 a year.
Homeowners in London and the South East, where property is more expensive, face an even more severe hit.
A household who bought a property in London for the average price of £566,000 with a 20% deposit will be £9,050 a year worse off.
It comes after reports the Treasury is considering a new tax on the sale of properties as it considers an overhaul to stamp duty and council tax.
Greg Marsh, household finance expert and CEO of Nous.co, said: “Hundreds of thousands of homeowners are in for an unpleasant shock this winter. The era of ultra-cheap mortgages is over.
“For these households, it’s leaving them thousands of pounds a year worse off.
“This adds an extra layer of stress to the process of remortgaging – which is already time-consuming and complicated.
“My advice to anyone in this position is to get professional advice from a reputable mortgage advisor to make sure they get the best deal and the right loan for their circumstances.”
Phillipa Jackson, Operations Director at Purplebricks Mortgages, says: “If you’re facing a renewal in the coming weeks and months, I urge you not to delay – start shopping around now, before your deal expires. Most lenders allow you to lock in a rate up to six months in advance.
“Speak to a mortgage broker who will have access to deals you may not see directly, and can help you navigate volatile rates. A good broker will also keep a close eye on the market after you’ve secured a deal – so if rates improve before your new mortgage completes, you won’t miss out.
“See what your existing lender is offering – some will offer reduced fees or better terms in a bid to keep you. Check your availability for other mortgage products they already have on offer.
“Budget ahead so you know exactly what your new payment will look like – and whether you can afford it. Review your household spending: could you save on energy, insurance, or subscriptions to free up cash?
“If you can, consider overpaying on your mortgage while the cheaper rate is still in place. Even small lump sums can reduce the balance and soften the blow.
“Review shorter-term fixes or tracker deals. While these are less predictable, they may provide you with flexibility should rates continue to fall this year, and into next.
“Check government and lender support schemes. Some banks still offer temporary switches to interest-only, or extended terms in cases of hardship.
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“The support lenders can offer will likely come in the form of restructuring – this means extending your term, switching you to an interest-only deal or pausing capital repayments.
“If you are worried about a rate increase, it’s wise to contact your lender now before any payments are missed.”
While mortgage rates have come down from the highs seen after Liz Truss’s mini budget, the cost of borrowing is still significantly higher than it was before the cost of living crisis.
The Bank of England base rate, now at 4%, remained at 1% or below from February 2009 until July 2022.
