Brace for impact: Millions face higher mortgage bills on remortgage
The Bank of England has today issued a stark warning to the millions of homeowners who are currently on a variable or fixed rate mortgage that are due to come up for remortgage in the coming years. It states that when they come up for remortgage their mortgage repayments are likely to rocket. As the Bank of England has been hiking interest rates in its efforts to bring down the Country’s inflation the cost to lenders of borrowing on the money markets has increased sharply and as a result most of the biggest lenders are hiking the cost of mortgages for new customers.
The Bank of England’s tightening cycle is no secret and thus should come as no surprise but that does not make it any less sobering to read that millions of homeowners face a ‘shock’ when they remortgage in the coming years. The key to those higher mortgage payments when a homeowner’s current deal comes to an end is market borrowing costs that have now nudged up over 4%. The big five have in recent weeks been slashing new mortgage rates but it’s the promotions to draw in new business that have seen the biggest cuts. Those are promoted in big rate cuts to borrow for a new mortgage and, in a price war between lenders, it makes for a great offer to secure the business of new buyers and those moving home. But what of the remortgagor? The homeowner with an existing deal due to expire who is looking to cut and paste and secure the same deal on similar terms and conditions.
The current mortgage rate cuts being offered by some of the biggest names on the high street, including Nationwide, Halifax and Virgin Money, are typically designed as promotional deals for people looking to take out a new mortgage. For example, remortgagers who are coming to the end of a fixed or tracker deal will be offered higher refinancing rates which are nowhere near as competitive as the rates that new borrowers can obtain.
As swap rates fall below 4% there are clearly opportunities for lenders to further cut advertised mortgage rates for new business, and indeed many are currently engaging in a price war. Meanwhile however, those with existing deals coming to an end will be paying higher rates of refinancing. Thus the spread between the lowest rate for new business and the higher rate for a remortgage has never been greater, putting a squeeze on borrowers’ pockets and potentially even curtailing their ability to move home.
But while prices for new deals have plummeted to record lows in the wake of recent falls in swap rates down below 4% on the long-term money markets – allowing for instance for new fixed rate deals of down to 4.59% for a five-year term and even just 4.24% on a seven year fixed rate for borrowers with a 10% deposit – it has become clear that massive numbers of borrowers will be far less well catered for when their current deal comes to an end, with a new mortgage payment which will be substantially greater than the existing payment, due to recent hikes on the money markets.
Practical Takeaways for Buyers:
- When is your current fixed or tracker mortgage deal up for renewal (‘expiring’)? Give yourself 3-6 months prior to the date and start searching out alternative mortgage deals for your remortgage on the expiring deal.
- Compare the interest rates of at least 3-4 different lenders including the major building societies such as Nationwide, large high street banks, such as Halifax and Virgin Money as well as some of the up and coming challenger banks who may have more competitive mortgage deals.
- When comparing deals go for longer fixes on better rates – before rates rise again on the market.
- Consider how any potential increase in your mortgage payments could affect you and speak to a mortgage broker for some flexibility around your mortgage.
The question of the market ability to sustain this war of prices on new business and any implications for refinance business, potentially leading to its own downturn in terms of home buyer activity and resultant falls in home buyer confidence, remains to be answered.
