How to survive the mortgage time bomb as interest rates remain high

The Bank of England has held the Bank Rate at 5.25pc, which may be a relief to thousands of homeowners who had been expecting it to rise further – but it’s still a 15-year high.

The mortgage market has also been looking calmer recently; August’s CPI inflation figures showed a promising drop, and some big name lenders have recently announced mortgage rate cuts.

That being said, average two-year fixes are still high, at 6.58pc according to analyst Moneyfacts.

Compared to the cheap rates many homeowners may be coming off, thousands are finding their monthly mortgage bills increasing by hundreds of pounds.

This guide will help homeowners navigate the storm, whatever their circumstances.

What should you do if you’re about to remortgage?

An estimated 800,000 fixed-rate mortgages are set to expire in the next six months, and 1.6 million next year, meaning potentially huge increases in payments.

Homeowners can often secure a new fixed offer up to six months before their deal expires, said David Hollingworth, of broker L&C Mortgages, and this does not commit you to taking up the offer.

You can later opt for a different deal if a better one comes along. With many fixed rates still increasing, it could be worth getting a remortgage offer in place as soon as you can.

However, fixing now is expensive, so you may be tempted to opt for a variable deal which tracks the Bank Rate. But this means you could come unstuck if the latter increases even further.

The average two-year fixed rate has reached 6.58pc, up from just 2.59pc two years ago, while five-year deals are at 6.07pc, according to Moneyfacts, the analysts.

Meanwhile, the average tracker rate is 6.17pc.

Those who are considering fixing their deal should consider their future plans. People aiming to sell within three years may want to stick with a two-year fix rather than a five-year deal so they have more flexibility when they move.

What should you do if you’re on a tracker mortgage?

Tracker, also known as variable-rate, mortgages follow the direction of the Bank Rate, meaning they could be favourable if interest rates are falling – but could prove costly in a climate of rising rates.

Adrian Anderson, of broker Anderson Harris, said they remained attractive to those who want flexibility but that they could soon become more expensive than fixed rates.

Mr Anderson said those who want certainty over their payments are more likely to opt for fixes, while others who want flexibility choose trackers.

Those who have a more comfortable financial position, and would be able to cope with an increase in outgoings should consider trackers, he explained, while those who want certainty over the costs should look at fixing.

He added that some people are considering trackers with no exit penalties. This means that if the fixed-rate market becomes more favourable they could switch without having to pay costly exit fees.

Be aware that there is no ceiling on how high repayments on a tracker deal could rise, and their volatile nature means they are not appropriate for households that prize certainty over savings.

What should you do if you’re on a standard variable rate?

Standard variable rates (SVR), which borrowers are moved to automatically if they do not remortgage when a fixed deal ends, are the most expensive. The average SVR is 8.09pc, according to Moneyfacts.

If you are on an SVR you should always try to switch to another rate if you can, Mr Anderson said. Some tracker rates are available without penalties so homeowners should see if they can qualify for one of these before opting for an SVR because they are cheaper.

The one exception is for homeowners who intend to sell in the near future and don’t want to pay any penalties to break out of a deal.

A very small number of borrowers may find they cannot switch from the SVR, perhaps because they are in negative equity or if there are penalties for doing so.

I’m on an interest-only mortgage and I can’t afford it. What should I do?

Interest-only mortgages, where homeowners do not clear the underlying capital on their loan but instead just pay the accrued interest, have grown in popularity.

Over the term of the loan, interest-only borrowers typically pay down the capital in chunks – using bonuses, commissions, or windfall inheritances.

Any equity which builds up in the house over time through house price growth can also be used to pay the capital back if the exit plan is to sell at the end of the mortgage term.

As monthly repayments tend to be lower for interest-only deals, those who will be unable to afford an increase in their rate are left with very few options. Switching to a repayment mortgage would mean that monthly payments would increase even more.

Mark Bogard, chief executive of lender Family Building Society, said if a borrower cannot afford repayments or has experienced a temporary drop in pay then they could consider asking for a mortgage holiday, where repayments would cease for a temporary period.

Those taking this option should remember that monthly interest will continue to accrue on the loan.

For those in need of a longer term solution, Mr Bogard said acting fast was always important.

He added: “In a falling housing market, you want to deal with it sooner rather than later. If you’ve got an interest-only mortgage going from 2pc to 6pc which you can’t afford, then you have to find a way to borrow less money. That may mean you have to downsize.

“We are seeing borrowers increasingly taking in lodgers.”

I’m a landlord – what should I do?

Landlords have a few options available to them if they are struggling to keep up with repayments.

Mr Anderson said they could raise the rent they charge tenants. People taking this route should remember that their tenants may not be able to afford an increase in costs and could choose to move out instead, which could lead to a void period, exacerbating the landlords’ money issues.

Buy-to-let investors could also consider increasing their repayments to help them refinance at higher interest rates.

There are also some lenders where, if the landlord has a high income, they will run what is called a “top slice calculation”, meaning if the rental income is not high enough to meet banks’ criteria, they will let the landlord use their own income to top up the perceived shortfall.

Mr Anderson said: “The big problem is actually getting the criteria to fit because interest rates have increased significantly over the last 18 months.

“The buy-to-let stress testing on the mortgage rate is much higher than it used to be and therefore unless the property has an extremely high rental yield or the mortgage has a very modest loan to value, it’s extremely difficult now for landlords to be able to refinance from one buy-to-let lender to another.”

If landlords are unhappy with rates available, they should consider selling their properties.

What should you do if you’re about to buy a home?

Those on the brink of taking their first steps onto the housing ladder will be looking at the current situation with abject horror.

People in this situation are likely to be better off taking a short fixed-rate mortgage. While they will be expensive, the pain will not get any worse in the short term and there could be cheaper options available when they come to remortgage.

Imran Hussain, of brokerage Harmony Financial Services, said that, despite the recent chaos in the mortgage market, many people were still choosing to buy because it works out cheaper than renting.

He said: “My advice to anyone looking to buy is figure out your budget and stick to it. Make an offer on a property and sit tight – don’t get sucked into the hype.”

Paying less for the property would also affect your mortgage. In most areas, he said price reductions are common. If a property has not been sold within four weeks and it’s under £500,000, don’t be afraid to make a “cheeky offer” that is well below the asking price.

How else can I bring down costs?

If none of these options work, then there are other ways that homeowners can bring down their costs.

One way to bring down the cost of a mortgage is to extend the term. This will reduce monthly payments, but be aware that the overall amount repaid will increase as more interest will accrue on the loan.

First-time buyers are increasingly turning to mortgages of 35 years, or even longer, in order to get on the ladder.

Monthly payments on a £200,000 mortgage at a rate of 6.15pc would be £1,307 a month. Extending the term to 35 years would reduce monthly payments to £1,161, but would mean that the overall cost of the loan would increase to £487,651 from £392,228.

Those currently on a repayment mortgage could consider switching to interest-only. This would decrease monthly outgoings – but be aware that the capital will not be reducing for the period of the loan.

This article is kept updated with the latest information.