Rising Mortgage Costs Force Homeowners to Reassess Their Options
As the UK mortgage market continues to evolve, thousands of homeowners are facing difficult decisions as their fixed-rate deals come to an end. Between July and the end of December this year, an estimated 900,000 households will be looking for new mortgage deals, according to industry data. These homeowners were previously benefiting from some of the lowest interest rates in history, with many securing rates between 1% and 2%. However, with current rates hovering around 4% or higher, the financial impact is significant.
For example, a £200,000 mortgage with a 25-year term would see monthly payments jump from approximately £784 to £1,040. This increase has made the decision on whether to fix for two, three, or five years more critical than ever. Shorter-term fixes offer the opportunity to lock in lower rates for a limited time, while longer-term fixes provide more stability, albeit at a higher cost.
Preference for Shorter-Term Fixes
Recent trends suggest that shorter-term deals are becoming increasingly popular among borrowers. Santander, one of the UK’s major lenders, reported that 54% of its customers opted for two-year fixed-rate mortgages in the first half of the year, compared to just 36% who chose five-year deals. The bank’s lowest two-year fixed rate is currently 3.8%, while its five-year rate stands at 3.86%. Both options come with additional fees, but the difference in rates remains minimal.
Mortgage broker Mortgage Advice Bureau also noted a similar trend, with 54,534 customers choosing two-year fixes versus 49,927 opting for five-year deals. David Hollingworth, associate director at L&C Mortgages, shared examples of clients who faced steep increases when their low-rate deals ended. One client saw their rate rise from under 2% to 3.92%, increasing monthly payments by almost £490, while another experienced a similar jump to 3.96%.
Despite these increases, neither client extended their mortgage term, which could have reduced monthly costs but increased long-term debt.
Sticking with Current Lenders or Switching?
Many homeowners choose to stay with their current lender when their fixed-rate deal ends. This option, known as a product transfer, allows them to switch to a new deal without going through the full process of applying with a different lender. Product transfers typically require less paperwork, no new affordability checks, and no property revaluation. However, there is no guarantee that the current lender will offer the best possible rate.
Aaron Strutt of Trinity Financial suggests that it may be worth exploring other lenders, especially given the recent shift in the market. “Competition has improved, and there are now many deals available below 4%,” he said. Borrowers should not assume they are getting the best deal simply because they are staying with their current provider.
Using Remortgaging to Raise Funds
Another growing trend is remortgaging to raise funds for home improvements or to pay off existing debt. Strutt noted that many clients are taking advantage of this strategy. For instance, one client used a remortgage to fund a major refurbishment, significantly increasing the value of their property. Another used the process to help their adult children with a deposit for their own home.
These strategies can help build equity and potentially secure better mortgage rates. Lenders often offer more favorable terms to borrowers with higher equity, measured by the loan-to-value (LTV) ratio. A borrower with 60% LTV could see much lower rates than someone with 90% LTV.
Extending the Mortgage Term
Some homeowners are considering extending their mortgage term to reduce monthly payments. While this approach lowers the amount due each month, it results in paying more interest over the life of the loan. For example, a £200,000 mortgage at 4.5% over 20 years would result in total payments of £303,672, compared to £431,580 over 40 years.
Nichola Jomoa, a mortgage adviser at Mortgage Advice Bureau, highlighted that this option is becoming more common. “We are seeing more clients extend their mortgage terms to keep payments affordable,” she said. However, this may not always be possible, particularly if the borrower is older or if the lender imposes higher interest rates.
Personal Impact and Lifestyle Adjustments
The rising cost of mortgages is already affecting personal budgets. Roque Way, a technical director, recently found himself in this situation. His current mortgage rate is 1.58%, but he is struggling to find a better deal. The new rate he’s been offered is 3.92%, which would increase his monthly payments from £857 to £1,285. To manage the extra cost, he plans to cut back on expenses such as his gym subscription.
“I’m glad we didn’t buy a larger home five years ago,” he said. “But the increase is still going to have an impact on our lives.” He added that he will now cover the extra cost, adjusting his lifestyle accordingly.