Specialist mortgage adviser, largemortgageloans.com, has compiled a list of the most asked questions from their clients over the past few weeks and, unsurprisingly, they reveal the confusion and worry that most are experiencing about the turbulent months ahead.
Given recent market movements and the continued increase in the Bank of England Base Rate, the majority of clients are worried about their mortgage rate, whether the product they are on is the right one for their situation or should they switch, and what are the options if they can’t afford their mortgage payments.
In response, largemortgageloans.com has been reassuring clients that they are not alone and, rather than worrying in silence, to seek help and guidance from an expert mortgage adviser.
Whether borrowers should stay with their current mortgage product and lender, or change, was high up on the list of queries. Questions asked included:
- Should I remortgage now, or wait?
- Should I remortgage now before the end of my fixed term?
- Is it worth remortgaging early?
Paul Welch, CEO and founder of largemortgageloans.com said, “The Bank Base Rate has risen significantly in 2022, as a result of rising inflation, and the impact the mini-budget had a couple of weeks ago on the cost of funds for mortgages.
As a result, the knock-on effect is that mortgages are now more expensive, and this applies to those on a variable rate product (which is linked to Bank Base Rate) and those looking to arrange a new fixed rate product.
“With this in mind, and taking into consideration a number of factors including the terms of the existing mortgage product, the borrower’s attitude to risk and both their current and future personal circumstances, then it may be worth considering locking into a competitive fixed rate now to avoid higher costs later.
“Many clients have asked us about whether it’s worth remortgaging early, before the end of their existing mortgage term, for which there is no simple answer.
“As each mortgage deal is unique, remortgaging early could well save money, even taking into consideration payment of early redemption fees to exit their current deal. However, waiting until a fixed term is close to expiring may also be a better option, as it all depends on the existing deal versus the new deal that is offered. Factors to consider include the amount they want to borrow, the loan to value and their current income and personal circumstances.
“The best time for a borrower to review their mortgage is around 6 months before the end of the fixed-rate period but, essentially, any time before the fixed rate ends is a good enough time.
“What borrowers want to avoid is their fixed rate coming to an end and then finding that they have been moved on their lender’s standard variable rate (SVR) which inevitably lead to higher mortgage payments.
“If borrowers are looking to remortgage onto a new mortgage product, it’s important that they don’t just accept the rate that their existing lender is offering. Some of the smaller, more specialist lenders can be more flexible and offer better terms and rates, so it’s key to shop around.”
A week is a long time in financial markets and given the market instability of the last few weeks, it’s no surprise that clients are worrying about mortgage rates. Analysts[i] are predicting that close to 40% of homeowners will struggle to meet mortgage repayments in 2023, so worries about rising rates is a legitimate concern. Questions asked included:
- Will mortgage rates go up in 2022/2023?
- Are borrowers confused about current mortgage rates?
Welch said, “On 22 September 2022, the Bank of England raised interest rates to 2.25%, making this the seventh rise since the beginning of December 2021, when bank rates stood at just 0.1%. With inflation currently sitting at 10.1%, which is 8.1% higher than the government’s 2% target, it’s likely that rates will again rise on the 3rd November when the Bank of England makes its next rate decision.
“What’s less certain is by how much, which is obviously leading to confusion amongst borrowers, who are unnerved by this sense of being in the dark about what will happen next.
“Mortgages are priced according to swap rates, which are based on financial market forecasts regarding inflation, interest rates and general economic activity. As long as there is market uncertainty, swap rates will continue to rise and mortgages will become increasingly expensive.
“Stability in the financial markets may lead to swap rates falling and, in turn, lead to cheaper mortgages. So although the Bank Base Rate may continue to rise, if the markets stabilise enough we may see swap rates come down and mortgage products be re-priced slightly.
“After the mini-budget announcement, swap rates jumped and lenders very quickly either withdrew certain products or re-priced them in an attempt to become more risk-averse in such volatile markets. But, thankfully, some lenders have started to re-enter the mortgage market again since Chancellor Hunt’s U-turn of the mini-budget calmed the market jitters somewhat. We can only hope that this continues and recent predictions of a Bank Base Rate peaking at 6% don’t come to fruition.”
Many clients, who have been used to more than a decade of cheap fixed rate mortgage products, are now wondering whether these products are the most suitable for their financial circumstances. The top questions our clients are asking include:
- Is it a good idea to get a 5 year fixed mortgage?
- What is the best fixed rate mortgage?
Welch said, “Taking a longer-term product has its advantages and disadvantages. The main advantage is that it provides long-term stability, as it means borrowers will lock in the interest rate for five years, even if the Bank of England base rate increases.
“This is especially useful in times of economic uncertainty like now when interest rates are fluctuating. Longer term fixed rate deals such as 10, 15 or even 40 year terms are also available. The downside is that cheaper products may come onto the market after having locked in, meaning that the borrower could pay less, in which case it may be worth paying the early repayment fees to break the current product, based on what they would be saving on the new one.
“As for the most suitable fixed rate mortgage, much of this depends on the loan to value of the borrower’s current mortgage, for example, how much are they borrowing against the value of their property? How much is left on their remaining term? Based on a 55% loan to value, a quick search shows that a 2-year fixed rate product currently starts at 5.49% and a 5 year is 5.31%.
There are legitimate concerns over whether many will be able to afford their mortgage repayments next year and by far one of the most urgent questions we have been asked is:
- What do I do if I can’t pay my mortgage?
Welch said, “Firstly, seek advice. Working with a mortgage broker, borrowers will be provided with the appropriate advice as to what actions can be taken. This might include remortgaging onto a different product.
“Secondly, a number of lenders will allow borrowers to take payment holidays, a concept which the Government insisted on during the pandemic, where borrowers can take up to 6 months off paying their mortgage. It’s important to note, that it’s not a holiday per-se; it’s deferring the payment until another month, meaning that interest will still be charged and added to the loan until the mortgage is paid off in full.
“Thirdly, borrowers could have the option to switch their monthly payment to interest only, meaning that they are only paying off the interest of the loan, not the capital amount. This could help provide a bit of breathing space until more affordable rates are available. However, some lenders will only allow switching to interest only up to a certain LTV.
“Finally, lenders do not want to repossess properties. If borrowers are worried and they and their mortgage broker have exhausted all other options, then the best option would be to speak to their lender to work on a solution that suits all parties.”
Although we are entering a period of market uncertainty, it’s important to reassure borrowers that there are options out there. Welch concludes;
“My main message to our clients has been try not to panic. We are not in a credit crunch like the one we experienced in 2007/08. The difference between then and now is that lenders want to lend, unlike back then when they stopped lending altogether because of the risk. Rates have risen because of the sudden increase in the cost of funding which lenders have to pay from the money markets and so there are solutions available.
“Help and guidance is available, and I would always advise seeking support from an experienced mortgage broker who can search the entire market of mortgage products to find the most suitable solution to meet their needs.”