A mortgage wake-up call for the middle classes

How much could your family finances shrink in the next few years? The answer could boil down to the size of your mortgage.

If you borrow a lot of money to buy your dream home, high interest rates It has the potential to dampen the purchasing power of the middle classes far more than increasing energy bills have done so far.

I have a friend who has been paying an extra £500 a month on her mortgage since she had a fixed rate deal. She needs to move out of her house in a year, for school reasons, so she doesn’t want to be locked into another solution.

When the Bank of England Base rate increase At half a percentage point last week – the biggest rise in 27 years – she sent me a WhatsApp message saying “Arrrrrghhhh”.

Most UK borrowers have stuck to a flat rate, but about 1.3 million will expire this year and 1.81 million next year, according to Britain’s financial trade body.

Bank of England data shows that more than £10 billion was paid on mortgages in the first six months of this year – a trend that is evident in Scan FT Money Reward In February, 13 percent of respondents said that was your intention.

Higher real estate prices, larger mortgages, and longer repayment periods mean that even a small change in interest rates will increase the lifetime costs of your home loan.

Here are some points to consider beforehand when the current fix is ​​out.

Get your papers in order

Anyone with a fixed mortgage needs to plan what to do when it expires. Find the date, ring it in your journal and be ready to start looking for a new deal at least six months in advance.

“The volume of mortgage applications that lenders are getting continues to be at very high levels, and we’ve seen two or three stops doing new business as they regain speed,” says Andrew Montlake, managing director of real estate brokerage Coreco.

He’s heard stories of clients waiting three to four weeks for an appointment for a mortgage review, at which time interest rates have gone up.

If you’re committed to the same lender, re-mortgage deals – known as retention products – usually can’t be secured until you have less than four months left. But if you are switching to a new lender, it is often possible to “secure” a rate six months before your current deal expires.

Expect to pay around £500 to get an independent mortgage broker to help you find the best deal for your circumstances.

Careful preparation should mean that you avoid the misery of returning to the lender’s Standard Variable Rate (SVR). The average SVR is already 5.17 percent, according to price comparison site Moneyfacts.

That number has been up for eight straight months and is likely to swell further, adding to the significant repayment shock for those declining in reform.

How long to fix?

You won’t thank me for saying that the best time to fix your mortgage was six months to a year ago.

Five-year repairs are still the most popular product, but the average price offered on these deals breached 4 percent in August, according to Moneyfacts — a level last seen in 2014.

The two-year average repair is a shade below this at 3.95 percent.

The more credit you have in your home, the better the rate you can secure. However, deals with lower prices tend to have the highest fees (usually £1,000 or more). Add the fees to your loan, and you’ll pay interest at the top.

Mortgage brokers are reporting early signs that more borrowers are willing to gamble on a two-year solution, betting that central banks will have to cut interest rates in a recession.

High-ranking American investors Kathy Wood And the Ray Dalio Both said they expect interest rates to be cut in 2023-24. However, non-billionaires are likely to value the certainty of a fixed interest rate on their largest monthly issued value.

Be prepared to make a quick decision

Whether you are buying a home or returning your mortgage, speed is the key factor. The average life of a mortgage product is just 17 days, according to Moneyfacts — an all-time low.

If the lender’s rate moves to the top of the best buying table, they often pull it in quickly to avoid the operational challenge of a deluge of applications.

“I can give a customer one rate at 9 a.m. and then have to call back at noon and say the deal was pulled at 5 p.m. today,” Coreco’s Montlake says. “Some customers think it’s a sales technique but that’s the reality of the market.”

Should you pay to cancel your current repair?

As prices rise, you may be tempted to pay a fine to end your current deal and stick to a new one.

As a general rule, the early repayment fee on a five-year repair is 5 percent of the balance due in the first year, and decreases on a graduated scale to 1 percent by the last year.

If you break a £500,000 mortgage fix with two years to go, it could cost you £10,000, plus product fees for a new mortgage – and your monthly payments will be immediately higher.

Is it worth it? Free mortgage calculator from budget app Nous.co It attempts to answer this question based on market expectations about where interest rates might be by the time the reform ends and what the potential costs or savings are.

I will also use a file Mortgage Overpayment Calculator To see what effect using that cash for a one-time payment can have, assuming your mortgage deal allows it, and whether this can tip you into a lower LTV. spriffa new app, that allows people to change their overpayment according to their monthly spending.

What about buying mortgages?

Landlords are more likely to have interest-only mortgages. Although most of them are restricted to fixed rate deals, this means that they will be exposed to greater fluctuations in cost than repayment borrowers when the rates expire.

Lenders apply a range of affordability calculations to buy-to-lease loans. The key factor is the interest coverage ratio – your monthly rent expressed as a percentage of your monthly interest payments – usually 125 to 145 percent.

However, lenders use the “stress rate” to calculate these ratios and this is much higher than the actual interest paid on the loan.

David Hollingworth, associate director at broker L&C Mortgages, notes that several lenders have increased their stress rates this month, and he expects others to follow. “The result would be that landlords would need to charge higher rents to borrow the same amount,” he says.

For example, Metro Bank has raised one of its stress rates from 4 to 5.5 percent, and is demanding 140 percent interest coverage.

For a mortgage of just £200,000, it calculates that this means landlords need an additional £350 of monthly rental income to meet the lender’s requirements.

As we’ve been hearing about Money Clinic Podcast This week, tenants have already found that these higher costs have been passed on to them, with letting agents in London Reports Rent rises by 40 per cent upon renewal of leases.

No matter how rising mortgage rates make you want to scream, just be grateful you have your own home.

Claire Barrett is Consumer Editor of the Financial Times: claer.barrett@ft.com; Twitter Tweet embed; Instagram Tweet embed

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