Millions of super-cheap mortgages expire in 2026 – here’s how you can prepare

Millions of homeowners who bagged five-year fixed mortgage deals when rates were the lowest in history are yet to feel the pain of rising interest rates, but experts are urging them to act now in order to lessen the blow when the dreaded day for rate renewal finally arrives.

This week the Bank of England forecast just how much pain that group, which enjoys the rock-bottom rates of 2021, will feel when their deals expire in 2026 (see chart below).

Around half a million people are expected to be paying between £500 and £749 more a month, while 250,000 households will be paying a staggering £1,000 a month more – £12,000 a year.

The worst thing you can do is stick your head in the sand. No-one knows where mortgage rates will be in three months, let alone three years, but there are steps you can take now to prepare and give yourself the best chance of keeping a lid on monthly repayments.

Repayments on around half of mortgages in Britain – around 4.5 million – have already increased since rates started to rise in late 2021, according to the Bank.

And higher rates are expected to affect the vast majority of the remaining home loans by the end of 2026, when the bulk of five-year fixes expire.

For the typical borrower rolling off a fixed-rate deal over the second half of 2023, the Bank says monthly interest payments will increase by around £220.

This is based on their mortgage rate rising by 3.25 percentage points.

Meanwhile, UK households’ disposable incomes are set to take a further hammering over the next 10 months, set to shrink by a collective £15bn – or £2,300 per household – according to a report by accounting firm Grant Thornton and data firm Retail Economics.

Simon Gammon, of mortgage broker Knight Frank Finance, said his company is encouraging everyone to get themselves into the most informed position possible – even if their mortgages aren’t up for renewal for some years.

He said: “Even if it doesn’t feel like a worry now, understanding what’s happening may change your behaviour ahead of renewal.

“The overwhelming theme is that even if you’re one of the lucky ones not yet affected, you can do things now to reduce the pain when the day comes to renew.”

So, what should borrowers who locked in their rates for longer be thinking about?

Work out how much you might have to pay

Use our calculator (below) to work out how much more you’ll have to pay when your fixed-rate ends.

Someone with a £200,000 outstanding mortgage balance will be paying around £739 each month on a 2pc fixed deal.

If that rate were to rise to 7pc, monthly repayments would jump to £1,331. On a £400,000 outstanding mortgage balance, the repayment would jump from £1,478 to £2,671.

Chris Sykes, of mortgage broker Private Finance, said the next thing is to “prepare to live within a budget on the new payment. For example, you can see if you can go three months saving the difference in payments.

“If payments are going from £1,500 to £2,500 a month, then work out whether you can save an extra £1,000 a month on top of your regular savings, if you do any.

“If this can be done with ease, then brilliant. If sacrifices need to be made then at least you can ease into these. Any savings made between now and the mortgage renewal date could be funnelled into the mortgage to then reduce the eventual mortgage payments.”

Using savings to make overpayments now

Mr Gammon said it could make sense for some mortgage holders to reduce their debt down now with savings to lessen the pain once they get to the end of their term. He said: “The sooner you start to do that the better.”

Most mortgage deals allow borrowers to pay off up to 10pc of their mortgage in any one year with no early repayment penalties.

Some fixed products will allow you to repay even more. In May, NatWest increased the amount a borrower can pay off in any one year penalty-free to 20pc.

Use our calculator to see if overpaying could work for you.

Many tracker mortgages have no early repayment penalties at all, according to Mr Gammon.

He said: “Clients of mine with larger pots of savings who don’t want to renew in the new rate environment are paying their entire mortgages off now.”

But is overpaying a good idea when house prices are falling?

For many, repaying large amounts of their mortgage loans now may seem scary in an economy where house prices are falling and disposable income is tight.

It could leave owners overpaying for an asset which later falls in value, and with less funds to fall back on in an emergency.

Josh Lillie, of Boon Brokers, said repaying early obviously means higher outgoings but warned that mortgage holders need to ensure monthly payments are manageable and that they are less likely to default in the future.

He added: “You should view repaying your mortgage as a long-term investment.

“In the short-term, property prices may fall. However, general house price inflation in the UK has remained at 4pc historically.

“Any current reductions in prices are offset by the huge increases the market saw over the last few years. It is a waiting game.”

House prices have fallen by around 3.5pc over the past year, according to Nationwide Building Society. But during the pandemic, house price growth reached double digits – meaning much of the gains owners made are still yet to be undone.

What if I have no savings?

Those borrowers with little to no savings do still have options. Mr Gammon said they typically have two routes.

One would be to create a future buffer by setting aside a percentage of their income each month.

The other – and Mr Gammon’s preferred route – would be to make small overpayments to the mortgage balance each month.

He explained: “You have to think about it as another month you’re not paying interest on that amount you reduced it by.”

He argued that because many of the high street lenders still haven’t passed on interest rate rises to customers’ instant access accounts, those with smaller balances aren’t getting much of a return on their cash.

So instead of leaving any savings sitting in a low-return earning account to cover future interest repayments, Mr Gammon reckons it will be more cost-effective to use savings to reduce the mortgage balance as they go – hence reducing the overall amount they are paying interest on.

Mr Gammon: “Even if it’s a modest amount, it will lessen the blow for when you come to remortgage.”

Switching to interest-only repayments

For those borrowers who have already remortgaged, or are set to remortgage this year, the City watchdog has asked lenders to consider allowing them to switch to interest-only repayments temporarily if full repayments are unaffordable.

Switching to interest-only means you stop paying back the capital, and only pay back the interest on the capital. It can dramatically reduce monthly repayments, but the means the capital is not being paid off – which could become a problem down the line.

Mr Sykes warned switching to interest-only was not a silver bullet.

He added: “ Lots of things – like going onto interest-only or extending a mortgage term – are vehicles to kick a can down the road. It is better to do something now if you can.”

Extending the mortgage term

An increasing number of borrowers have been extending the term of their mortgage, in an effort to lower monthly repayments.

The flip side is that you will end up paying far more in total as less of the mortgage is paid off each month.

But Mr Lillie said while increasing the term can increase the amount of interest payable and therefore increase the cost of the overall mortgage, the fact the term can be reduced again in the future upon remortgaging means these costs can be kept to a minimum.

He added: “It is important that the client is protected from potentially missing future mortgage payments and reducing the monthly payment can do this.

“Clients should consider the worst-case scenario to ensure that, for instance, they are not forced to delay their retirement due to extending their mortgage term.”