It’s always important to keep an eye on mortgage trends, and how they may impact you when it’s time to remortgage or even take out your first mortgage. The last couple of years however have been especially turbulent for mortgage holders, with interest rates soaring and the cost of living crisis affecting so many. And while interest rates are finally beginning to settle, it still pays for borrowers to be organised and well informed.
Despite mortgage rates beginning to fall, they remain very high; crucially, far higher than when most borrowers last remortgaged. The base rate remains at 5.25%, after the Bank of England voted to pause rate hikes in September, ending a run of 14 consecutive increases. Despite this, average mortgage rates are still around 6%; considerably higher than in the past decade, dramatically impacting monthly repayments for a great many at an already difficult time.
According to the Office for National Statistics, more than 1.4 million people will remortgage this year, many of whom will be coming to the end of fixed rate deals as low as 1% or 2%. Approximately 2.2 million homeowners are on variable-rate mortgages, with the current average standard variable rate (SVR) a huge 8.18%. Since some lenders have been cutting rates in recent weeks in light of interest rates being held at 5.25%, those who have been on a variable rate waiting for a good time to move to a fixed rate might be wise to do so now.
While experts are expecting the Bank of England to cut rates next year, the certainty of a fixed rate now will bring peace of mind. So for many people, it could be a good time to think about remortgaging, and about what type of mortgage might suit them best moving forward. Below we’ve outlined the different types of mortgages available, as well as their individual advantages.
Fixed Rate Mortgage
With a fixed-rate mortgage, the interest rate remains constant for a predetermined period, usually between 2 to 10 years.
Advantages: Predictable monthly payments provide stability, making it easier to budget. It shields homeowners from interest rate fluctuations.
Disadvantages: If mortgage rates fall, you will be stuck paying the same rate of interest. Once a fixed-rate deal ends, the interest you pay will switch to the lender’s SVR, which is typically higher and also far less predictable.
Tracker Mortgage
This mortgage type “tracks” or follows the Bank of England’s base rate, plus a set percentage.
Advantages: Offers the potential for lower interest rates if the base rate decreases, but payments may rise if the base rate goes up.
Disadvantages: This is a higher risk option as there is no limit to how high the interest rate can go.
Variable Rate Mortgage
Variable mortgages follow the lender’s SVR, which may rise even if the Bank of England’s base rate does not. The interest rate can fluctuate at the lender’s discretion, impacting the amount of monthly repayment.
Advantages: Initial rates can be lower than fixed-rate mortgages, and borrowers may benefit if interest rates decrease.
Disadvantages: While initial interest rates may be affordable, these can rise significantly without warning.
Discount Mortgage
Similar to a variable rate mortgage, but with a discount on the lender’s standard variable rate (SVR).
Advantages: Initial payments are lower than the SVR, but they can rise if the SVR increases.
Disadvantages: You’re at the mercy of your lender, who can increase their SVR at will, which directly affects your rate.
Interest-Only Mortgage
Borrowers only pay the interest on the loan during the mortgage term, with the principal amount remaining the same.
Advantages: Lower monthly payments.
Disadvantages: You’ll need to have a repayment plan in place for the lump sum at the end of the term.
Buy-to-Let Mortgage
Specifically for those purchasing a property with the intention of renting it out.
Advantages: Tailored to the needs of landlords, with potential tax advantages.
Disadvantages: Usually a much higher interest rate, so you’ll need to be sure your income form the property will cover this and any other associated costs.
Before choosing a mortgage type, it’s crucial to carefully consider your individual financial circumstances, personal risk tolerance, and long-term goals. Consulting with a mortgage advisor can provide personalised guidance based on your specific situation.
Anyone experiencing difficulties with their mortgage repayments should seek advice from their lender, as a new charter has been put in place with support measures intended to help those in difficulty. Borrowers may, for example, switch to interest-only payments for a period, or perhaps extend their mortgage term in order to reduce their monthly payments. Getting ahead of financial difficulties is key, so be sure to have a conversation with your financial advisor or mortgage broker sooner rather than later.
